Working Paper: NBER ID: w7236
Authors: Joseph G. Altonji; Paul J. Devereux
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.
Keywords: No keywords provided
JEL Codes: E24; E31; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal wage rigidity (J31) | nominal wage cuts (J38) |
| nominal wage rigidity (J31) | nominal freezes (C54) |
| nominal wage cuts (J38) | changes in employment status or compensation schemes (J63) |
| nominal wage rigidity (J31) | quit rates (J63) |