Wage Rigidity: Measurement, Causes and Consequences

Abstract

Wage rigidity – the observation that wages cannot be adjusted downwards – has important implica-tions for labour markets and macroeconomic performance. Empirical evidence on the extent, causes and consequences of wage rigidity on the individual level is relatively scant, however. This Feature presents articles that apply a new methodology to estimate the incidence and extent of nominal and real wage rigidity among the employed in three major European countries (Germany, Italy and Great Britain). The results document the pervasiveness of nominal and, particularly, real wage rigidity in different institutional and economic environments, and a recent decline in real wage rigidity. The responsiveness of wages to the economic environment shapes labour market outcomes in important ways. If wages exceed the market clearing level and are rigid downwards, i.e., do not adjust in order to equilibrate supply and demand, involuntary unemployment can arise. Wage rigidities also have been identified as important determinants of the cyclical adjustment dynamics of output, as well as vacancies and unemployment that are difficult to rationalise with models with flexible wages.1 Despite the important consequences of wage rigidities, surprisingly little is known empirically about their extent and their measurement. Nor is there a consensus in the empirical

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