How Wages Change: Micro Evidence from the International Wage Flexibility Project

Abstract

Workers' wages are not set in a spot market. Instead, the wages of most workers-at least those who do not switch jobs-typically change only annually and are mediated by a complex set of institutions and factors such as contracts, unions, standards of fairness, minimum wage policy, transfers of risk, and incomplete information. The goal of the International Wage Flexibility Project (IWFP)-a consortium of over 40 researchers with access to individual workers' earnings data for 16 countries-is to provide new microeconomic evidence on how wages change for continuing workers. Wage changes due to worker mobility are governed by different processes and are beyond the scope of this study.A key question in the theoretical and empirical literature, as reviewed in

The Incidence of Nominal and Real Wage Rigidity: An Individual-Based Sectoral Approach

“…There are different approaches in the literature to estimate the extent of rigidities from individual data. 2 Several studies draw inference about rigidities from asymmetries in the wage change distribution (see Card and Hyslop 1997;Dickens et al 2007). A second group of estimates are based on the assumption that, in the absence of changes in the extent of rigidity, the shape of the wage change distribution is constant over time (see Kahn [1997] and Christofides and Nearchou [2007] for an extension to study DRWR).…”

“…Measures based on symmetry are problematic when reasonable estimates of the expected rate of inflation lie above the median wage change (see Dickens et al 2007). Extending Kahn to allow for both DNWR and DRWR is possible, but it requires sufficient variation in the median of the distribution to allow the different types of rigidity to be identified.…”

“…This assumption, that all autocorrelation in wage changes is due to measurement error, has been extensively verified using data from Gottschalk (2005). Controlling for measurement error is crucial, because studies correcting for measurement error consistently find more evidence of DWR, as reviewed in Dickens et al (2007). Once an error-free wage change distribution is obtained, we fit a model of wage changes using generalised method of moments (GMM) techniques.…”

“…Hence, the extent of downward nominal wage rigidity prevailing in the economy has stark implications for the optimal level of inflation (Fagan and Messina 2009) This renewed interest and the increasing availability of individual and firm-level data with relatively accurate information on individual wages saw a flourishing of empirical literature assessing the extent of downward nominal wage rigidities in different countries and periods. The International Wage Flexibility Project (IWFP), a large network studying wage rigidities from individual data in 17 OECD countries, showed that in many (mostly European) wage change distributions there are asymmetries around the expected rate of inflation, rather than at zero wage changes (Dickens et al 2007). This was interpreted as evidence of downward real wage rigidity, and raised a number of questions such as the determinants and consequences of nominal versus real rigidities, and their relationship to inflation.…”

“…This paper applies the methodology from the IWFP to study the incidence of downward wage rigidity (DWR). Unlike Dickens et al (2007Dickens et al ( , 2009, where nominal and real rigidity are measured from individual wage change distributions at the aggregate level, we estimate downward nominal wage rigidity (DNWR) and downward real wage rigidity (DRWR) based on individual data for 13 sectors (both manufacturing and services) in four countries: Belgium, Denmark, Spain, and Portugal. The time frame of the study spans the period from 1990-2007, although the years available vary from country to country.…”