Wages Are Flexible, Aren’t They? Evidence from Monthly Micro Wage Data

Abstract:     
This paper assesses the degree of wage flexibility in Luxembourg using an administrative data set on individual base wages covering the entire economy over the period 2001-2006 with monthly frequency. We find that the wage flexibility at the discretion of the firm is rather low once we limit measurement error and remove wage changes due to institutional factors (indexation, changes in statutory minimum wage, age and marital status). The so adjusted frequency of wage change lies between 5% and 7%. On average, wages change less often than consumer prices. Less than one percent of (nominal) wages are cut both from month to month and from year to year. Due to automatic wage indexation, wages appear to be subject to substantial downward real wage rigidity. Finally, wage changes tend to be highly synchronised as they are concentrated around the events of wage indexation and the month of January.

Number of Pages in PDF File: 62

Keywords: wage flexibility, wage rigidity

JEL Classification: J31

working papers series