The Extent and Consequences of Downward Nominal Wage Rigidity

Joseph Altonji and Paul Devereux

No 7236, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using the Panel Study of Income Dynamics, we find that true wage changes have many fewer nominal cuts and more nominal freezes than reported nominal wage changes. The data overwhelmingly rejects a model of flexible wage changes and provides some evidence against a model of perfect downward rigidity in favor of a more general model. The more general model incorporates downward rigidity but specifies that nominal wage cuts may occur when large cuts would occur in the absence of wage rigidity. However, the results of the general model imply that nominal wage cuts are rare. We also analyze the personnel files of a large corporation and find cuts in base pay are rare and almost always associated with changes in full time status or a switch between compensation schemes involving incentives. Our evidence on the consequences of nominal wage rigidity is mixed. We find modest support for the hypothesis that workers who are overpaid because of nominal wage rigidity are less likely to quit.

JEL-codes: E24 E31 (search for similar items in EconPapers)
Date: 1999-07
New Economics Papers: this item is included in nep-dge, nep-lab and nep-ltv
Note: LS
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Citations: View citations in EconPapers (155)

Published as Polachek, Solomon W. (ed.) Worker well-being, Research in Labor Economics, vol. 19. Amsterdam. New York and Tokyo: Elsevier Science, JAI, 2000.

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Working Paper: The extent and consequences of downward nominal wage rigidity (2000)
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