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

62 Pages Posted: 16 Jun 2009

See all articles by Patrick Lunnemann

Patrick Lunnemann

Banque Central du Luxembourg

Ladislav Wintr

Clark University

Date Written: July 16, 2009

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.

Keywords: wage flexibility, wage rigidity

JEL Classification: J31

Suggested Citation

Lunnemann, Patrick and Wintr, Ladislav, Wages Are Flexible, Aren’t They? Evidence from Monthly Micro Wage Data (July 16, 2009). ECB Working Paper No. 1074, Available at SSRN: https://ssrn.com/abstract=1433369

Patrick Lunnemann

Banque Central du Luxembourg ( email )

2, boulevard Royal
L-2983 Luxembourg
Luxembourg

Ladislav Wintr (Contact Author)

Clark University ( email )

950 Main Street
Worcester, MA 01610
United States

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