Monetary Policy and the Cost of Wage Rigidity: Evidence from the Stock Market

Abstract

Using a unique confidential contract level dataset merged with firm-level asset price data, we find robust evidence that firms' stock market valuations and employment levels respond more to monetary policy announcements the higher the degree of wage rigidity. Data on the renegotiations of collective bargaining agreements allow us to construct an exogenous and accurate measure of wage rigidity. The amplification induced by wage rigidity is stronger for firms with high labor intensity and low profitability. There are clear distributional consequences of monetary policy. We rationalize the evidence through a model in which firms in different sectors feature different degrees of wage rigidity due to staggered renegotiations visa -vis unions.

Do Sticky Wages Matter? New Evidence from Matched Firm Survey and Register Data

“…They use the share of workers with collectively bargained wages as an instrument to account for potential endogeneity of their wage rigidity variable. Faia and Pezone (2018) provide evidence that monetary policy announcements induce higher volatility in stock returns for Italian firms that are more constrained by legally fixed wages. 7.…”

“…They find a stronger impact of monetary policy shocks on real activity in states with sticky wages compared to states with flexible wages. Faia and Pezone (2018) provide evidence that monetary policy announcements induce higher volatility in stock returns for Italian firms that are more constrained by legally fixed wages.…”