The extent and consequences of downward nominal wage rigidity

Paul Devereux and Joseph Altonji

Open Access publications from School of Economics, University College Dublin

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.

Keywords: Wages; Employee retention (search for similar items in EconPapers)
JEL-codes: E24 E31 J3 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2000
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Citations: View citations in EconPapers (136)

Published in: Research in Labor Economics, 19() 2000

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http://hdl.handle.net/10197/311 Open Access version, 2000 (application/pdf)

Related works:
Working Paper: The Extent and Consequences of Downward Nominal Wage Rigidity (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:oapubs:10197/311

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