Wage Rigidity and Job Creation

Abstract

Shimer (2005) and Hall (2005) have documented the failure of standard labor market search models to match business cycle fluctuations in employment and unemployment. They argue that it is likely that wages are not adjusted as regularly as suggested by the model, which would explain why employment is more volatile than the model predicts. We explore whether this explanation is consistent with the data. The main insight is that the relevant wage data for the search model are not aggregate wages, but wages of newly hired workers. Our results show that wages for those workers are much more volatile than aggregate wages and respond one-for-one to changes in labor productivity. Thus, we find no evidence for wage rigidity.JEL Codes: E24 E32 J31 J41 J64

The determination of wages of newly hired employees: Survey evidence on internal versus external factors

“…The evidence collected contributes to the debate on the flexibility of wages of new hires (see, inter alia, Haefke et al,2008;Gertler and Trigari, 2009;Pissarides, 2009) an issue of great importance for job creation and for the behavior of employment and wages over the business cycle.…”

“…The degree of rigidity of the wages of newly hired workerswith rigidity in this context referring to the absence of deviations of the wage paid to new hires from that paid to incumbent employees with similar qualifications and experience -has been investigated less. This is so despite the importance of the matter for job creation and for the behaviour of employment and wages over the business cycle (see inter alia Pissarides, 2009 andHaefke et al, 2008). For example, using a macro-economic model that allows for different degrees of rigidity in the wages of new hires versus incumbents, de Walque et al (2009) show that higher stickiness of wages of new hires leads firms to respond to shocks by adjusting employment.…”

Wage cyclicality: Evidence from Spain using social security data

“…However, this strategy restricts the sample to individuals who work in two consecutive periods-or years given that most studies are based on annual or bi-annual surveys. For this reason, studies that estimate wage cyclicality for newly-hired workers-or any group of workers with weak labour force attachment-run a wage equation in levels (Carneiro et al 2012;Haefke et al 2013;Kudlyak 2013). By following this approach, I can exploit the full sample of workers including job stayers, newly-hired workers and job-movers.…”

An Incentive Theory of Matching

“…9 An employee separates from her job when at least one of two conditions is satis…ed: (i) she is …red or (ii) she quits. Thus the separation probability is…”

“…Then the job acceptance rate becomes = C e U , the job retention rate becomes C e N so that the quit rate becomes = 1 C e N . 9 All other variables (without subscripts) refer to the current period.…”