The Extent and Consequences of Downward Nominal Wage Rigidity

52 Pages Posted: 20 Apr 2000 Last revised: 11 Apr 2021

See all articles by Joseph G. Altonji

Joseph G. Altonji

Yale University - Economic Growth Center; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Paul J. Devereux

University College Dublin - Department of Economics; IZA Institute of Labor Economics

Date Written: July 1999

Abstract

Using the Panel Study of Income Dynamics, we find that true wage changes have many fewer nominal cuts and more nominal freezes than reported nominal wage changes. The data overwhelmingly rejects a model of flexible wage changes and provides some evidence against a model of perfect downward rigidity in favor of a more general model. The more general model incorporates downward rigidity but specifies that nominal wage cuts may occur when large cuts would occur in the absence of wage rigidity. However, the results of the general model imply that nominal wage cuts are rare. We also analyze the personnel files of a large corporation and find cuts in base pay are rare and almost always associated with changes in full time status or a switch between compensation schemes involving incentives. Our evidence on the consequences of nominal wage rigidity is mixed. We find modest support for the hypothesis that workers who are overpaid because of nominal wage rigidity are less likely to quit.

Suggested Citation

Altonji, Joseph G. and Devereux, Paul J., The Extent and Consequences of Downward Nominal Wage Rigidity (July 1999). NBER Working Paper No. w7236, Available at SSRN: https://ssrn.com/abstract=202741

Joseph G. Altonji (Contact Author)

Yale University - Economic Growth Center ( email )

Box 208269
New Haven, CT 06520-8269
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Paul J. Devereux

University College Dublin - Department of Economics ( email )

Belfield
Dublin 4, 4
Ireland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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