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The Extent of Downward Nominal Wage Rigidity: New Evidence from Payroll Data

Daniel Schaefer () and Carl Singleton ()
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Daniel Schaefer: Institut für Volkswirtschaftslehre, Johannes-Kepler-Universität Linz

Authors registered in the RePEc Author Service: Daniel Schäfer

No em-dp2021-22, Economics Discussion Papers from Department of Economics, University of Reading

Abstract: We use over a decade of representative payroll data from Great Britain to study the nominal wage changes of employees who stayed in the same job for at least one year. We show that basic hourly pay drives the cyclicality of marginal labour costs, making this the most relevant measure of wages for macroeconomic models that incorporate wage rigidity. Basic hourly pay adjusts much less frequently than previously thought in Britain, particularly in small firms. We find that firms compress wage growth when inflation is low, which indicates that downward rigidity constrains firms' wage setting. Further, the wages of new hires and incumbent employees respond equally to the business cycle. We demonstrate that the empirical extent of downward nominal wage rigidity (DNWR) can theoretically cause considerable long-run output losses. Combined, our results all point to the importance of including DNWR in macroeconomic and monetary policy models.

Keywords: Downward nominal wage rigidity; Hiring wages; Unemployment fluctuations; Macroeconomic policy; Marginal labour costs (search for similar items in EconPapers)
JEL-codes: E24 E32 J31 J33 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2021-11-30
New Economics Papers: this item is included in nep-eur, nep-hrm, nep-lma and nep-mac
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