Working Paper: CEPR ID: DP13407
Authors: Ester Faia; Vincenzo Pezone
Abstract: Private efficiency of wage rigidity has taken center stage in economics. Measuring its effects has proven elusive for lack of actual wage data. Using a unique confidential labor contract level dataset matched with firm-level high frequency asset prices, we find robust evidence that firms’ stock prices and employment fluctuate more in response to monetary policy announcements the higher the degree of wage rigidity. Our empirical strategy is guided by a model of collective bargaining with time- and state-dependent structure. Hand-collected information on the periods across renegotiations of collective bargaining agreements allow us to construct an accurate and predetermined measure of wage rigidity. We find that the amplification induced by wage rigidity is stronger for firms with high labor intensity, low profitability, and a large share of workers with more rigid contracts.
Keywords: matched employer-employee dataset; firms; cost of wage rigidity; predetermined measure of wage rigidity; high-frequency identification; heterogeneous wage rigidity
JEL Codes: E52; G14; J52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage rigidity (J31) | fluctuations in stock prices (E32) |
| fluctuations in stock prices (E32) | stock returns volatility (G17) |
| contractionary monetary policy shocks (E39) | employment levels (J23) |
| wage rigidity (J31) | employment levels (J23) |
| wage rigidity (J31) | stock market valuations (G10) |