Wage Flexibility in Britain: Some Micro and Macro Evidence

37 Pages Posted: 27 Aug 2007

See all articles by Mark Schweitzer

Mark Schweitzer

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: July 2007

Abstract

This paper uses the British New Earnings Survey (NES) to derive both macro and micro measures of wage rigidities. The data set spans the 1975-2000 period, with wage observations covering approximately 1% of the British workforce. Using this data set, we consider whether wages have become more flexible in recent years. Evidence drawn from macroeconomic wage equation estimates suggests that, while the relationship between wages and unemployment seems to have changed, the responsiveness of wages to unemployment rates has declined in the 1990s. In contrast to previous findings, these results suggest that wages have become less flexible. Micro tests mainly reveal that the prevalence of nominal rigidities has not declined, although there is weak evidence for a decline in the most recent years. Micro tests of wage rigidities also include an analysis of real wage rigidities. There is evidence in the NES of spikes in the wage-change distribution at the rate of inflation, beyond what would be anticipated from the rest of the distribution, suggesting the presence of real wage rigidities. This evidence is shown to be statistically significant, and points to an increase in real rigidities over the period of study.

Keywords: Wage rigidities, wage flexibility, wage changes

JEL Classification: E24, J31

Suggested Citation

Schweitzer, Mark, Wage Flexibility in Britain: Some Micro and Macro Evidence (July 2007). Bank of England Working Paper No. 331, Available at SSRN: https://ssrn.com/abstract=1009167 or http://dx.doi.org/10.2139/ssrn.1009167

Mark Schweitzer (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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