Rigid Wages and Contracts: Time- versus State-Dependent Wages in the Netherlands

Abstract

We study nominal wage rigidity in the Netherlands using administrative data, which has three key features: (1) high-frequency (monthly), (2) high-quality (administrative records), and (3) high coverage (the universe of workers and the universe of firms). We find wage rigidity patterns in the data that are similar to wage behavior documented for other European countries. In particular we find that the hazard function has two spikes, one at 12 months and another one at 24 months and wage changes have time and state dependency components. As a novel and important piece of evidence we also uncover substantial heterogeneity in the frequency of wage changes due to explicit terms of the labor contract. In particular, contracts featuring flexible hours, such as on-call contracts, exhibit a higher probability of a change in the contract wage compared to fixedhour contracts. Once we split the sample based on contract characteristics, we also find that the response of wage changes to the time and state component is heterogeneous across different type of contracts -with relatively more downward adjustments in flexible-hour contract wages in response to aggregate unemployment.

Macro-Welfare Effects of Flexible-Hour Contracts

“…Third and perhaps most importantly, we find that a larger flex sector size increases the role of high wage flexibility in the fixed sector for the aggregate welfare. This is because higher wage flexibility in the fixed sector helps to reduce the high volatility of the worked hours in the flex sector that hurts households, which is a notorious feature of flex-hour contracts (Grajales et al, 2018). In this respect, different from the findings by Galí and Monacelli (2016), we show that even in a currency union, an increase in wage flexibility could monotonically increase welfare as long as there is a large flex sector in that economy.…”

“…This is because nominal wage rigidities are more important than nominal price rigidities for explaining the dynamic effects of monetary policy shocks. The relevance of nominal wage rigidity is even more fundamental to understand the macro-dynamics of economies that have joined a currency union, because in those cases the exchange rate is no longer available as an adjustment mechanism (Farhi et Our work is also related to the literature that measures rigid wages using high-frequency wage data (Barattieri et al, 2014;Grajales et al, 2018;Sigurdsson and Sigurdardottir, 2016). A particularly important paper for us is Grajales et al (2018).…”

“…The relevance of nominal wage rigidity is even more fundamental to understand the macro-dynamics of economies that have joined a currency union, because in those cases the exchange rate is no longer available as an adjustment mechanism (Farhi et Our work is also related to the literature that measures rigid wages using high-frequency wage data (Barattieri et al, 2014;Grajales et al, 2018;Sigurdsson and Sigurdardottir, 2016). A particularly important paper for us is Grajales et al (2018). They study the role of different types of labor contracts in explaining rigid wages in the Netherlands.…”

“…What makes flex-hour contracts so interesting for firms, is the fact that firms may use flex workers to reduce labor costs by reducing both worked hours and wages at the same time (Adams-Prassl et al, 2020; Josten and Vlasbom, 2018). To support this argument, in a recent paper, Grajales et al (2018) study the role of different types of labor contracts in explaining rigid wages in the Netherlands. Consistent with the view that firms use flexhour contracts to reduce labor costs, the authors find that (1) flexible-hour labor contracts exhibit substantially more wage flexibility, and (2) worked hours of the flex-hour labor contracts are more likely to reduce during a downturn compared to all other contracts.…”