Downward Rigidity in the Wage for New Hires
100 Pages Posted: 21 Jan 2021
Date Written: November 10, 2020
Downward wage rigidity is central to many explanations of unemployment fluctuations. In benchmark models, the wage for new hires is key, but there is limited evidence of downward rigidity on this margin. We introduce a dataset that tracks the wage for new hires at the job level — across successive vacancies posted by the same job title and establishment. We show that the wage for new hires is rigid downward but flexible upward, in two steps. First, the nominal wage rarely changes at the job level. When wages do change, they fall infrequently. Second, when unemployment rises, wages do not fall — but wages do rise strongly as unemployment falls. We show prior strategies cannot detect downward rigidity due to job composition. Then with a standard model, we argue downward wage rigidity at the job level is key for unemployment fluctuations. Unemployment responds four times more to negative than to positive labor demand shocks.
Keywords: Wage Rigidity, Unemployment, Business Cycles
JEL Classification: E24, J30, E27
Suggested Citation: Suggested Citation