04 August 2011

Working Paper on nominal wage rigidity and wage setting

Central Bank of Iceland has published Working Paper nr. 55, “Evidence of nominal wage rigidity and wage setting from Icelandic microdata”, by Jósef Sigurdsson and Rannveig Sigurdardottir.

The paper presents new evidence about wage stickiness and the nature of wage setting using a unique micro dataset covering wages in the Icelandic private sector each month for the period from 1998-2010. The paper makes the following conclusions: First, the mean frequency of wage change in the sample is 10.8% per month but when weighted for heterogeneity across industries and occupations the frequency of change is 10.5% per month. Second, only 0.5% of monthly wage changes are decreases. Third, the mean duration of wage spells is 8.9 months. One-fifth of wage spells last longer than a year while other spells last for one year or shorter. Fourth, wage setting displays strong features of time-dependence: half of all wage changes are synchronised in January, but other adjustments are staggered through the year. Fifth, there is limited evidence of state-dependence: frequency of wage increases, size of increases, frequency of wage decreases and size of decreases do not correlate with inflation. However, both frequency and size of wage decreases correlate significantly with unemployment. Sixth, the hazard function for wages is mostly flat during the first months but has a large twelve-month spike. These facts align with a model of time-dependent wage contracts of fixed duration.

The paper can be found on this page.

A direct link to the paper is here