How Wages Change: Micro Evidence from the International Wage Flexibility Project

Abstract

Workers' wages are not set in a spot market. Instead, the wages of most workers-at least those who do not switch jobs-typically change only annually and are mediated by a complex set of institutions and factors such as contracts, unions, standards of fairness, minimum wage policy, transfers of risk, and incomplete information. The goal of the International Wage Flexibility Project (IWFP)-a consortium of over 40 researchers with access to individual workers' earnings data for 16 countries-is to provide new microeconomic evidence on how wages change for continuing workers. Wage changes due to worker mobility are governed by different processes and are beyond the scope of this study.A key question in the theoretical and empirical literature, as reviewed in

The Incidence of Nominal and Real Wage Rigidity: An Individual-Based Sectoral Approach

“…The IWFP method, reviewed at length in Dickens and Goette (2006), estimates DWR at the individual level (using employee wage data), but from the perspective of the firm (looking only at wage changes of workers that stayed with the same firm in two consecutive years). Hence, we abstract from wage flexibility associated with worker turnover.…”

“…This paper applies the methodology from the IWFP to study the incidence of downward wage rigidity (DWR). Unlike Dickens et al (2007Dickens et al ( , 2009, where nominal and real rigidity are measured from individual wage change distributions at the aggregate level, we estimate downward nominal wage rigidity (DNWR) and downward real wage rigidity (DRWR) based on individual data for 13 sectors (both manufacturing and services) in four countries: Belgium, Denmark, Spain, and Portugal. The time frame of the study spans the period from 1990-2007, although the years available vary from country to country.…”

Real and nominal wage rigidities in collective bargaining agreements

“…Since our choice ofP jt is unbiased, the parameterisation of the regression function will coincide with the parameterisation of the function that gives the true height P jt , specified in stage 1 in (8). In this way, the estimation of the parameters of the regression ofP jt will lead to the estimation of the unknown parameters of the parameterisation of P jt , and subsequently to the testing of the hypotheses of interest that were formulated in stage 1.…”

“…The data base contains information on provisions for 10,945 wage contracts signed in the Canadian unionised sector and involves settlement dates as early as 1976 and as late as 1999. The agreements cover bargaining units involving 200 to nearly 80,000 employees, 7 in both the private and the public sector, 8 and their 6 In the case of DNWR, the assumption of continuity is sufficient to identify its effects due to the presence of a spike at zero, and the sudden fall in the level of the actual pdf to the left relative to its level to the right of zero. 7 Rough calculations show that, between 1998 and 1999, the proportion of employees covered by collective agreements whose coverage extended to more than 200 employees was 11% of the total working population in Canada.…”

“…(See Christofides and Stengos(2003), footnote 11). 8 In total 4567 (or 41.7%) of the contracts refer to the private sector and the remaining 6378 to the public.…”