Wage and Price Joint Dynamics at the Firm Level: An Empirical Analysis

Abstract

This article provides evidence about the interrelationships between wages and prices at the microeconomic level. We rely on the right-to manage model to specify and estimate a multivariate model explaining the timing and magnitude of wage changes at the firm level. The modeling of price changes relies on a state-dependent model. The data we use is a quarterly panel of about 1800 firms from the French manufacturing industry, observed over the years 1998 to 2005. We find the occurrence of wage changes to be essentially time dependent, though weakly related to the state of the economy. However, the magnitude of wage changes strongly depends on macroeconomic variables, namely inflation and unemployment, and to a lesser extent on the evolution of the firm product price and on its productivity gains. Changes in the firm product price are mostly driven by the evolution of its costs and more specifically by that of its intermediate inputs. The wage cost, as well as the production and the industry level inflation, have a weaker influence.

Keywords: Wages, Price Stickiness, Dynamic Model, Factor Loadings

JEL Classification: E31, C23, C25