DP8968 Wage Rigidity and Job Creation

Author(s): Christian Haefke, Marcus Sonntag, Thijs van Rens
Publication Date: May 2012
Keyword(s): business cycle, search and matching models, wage rigidity
JEL(s): E24, E32, J31, J41, J64
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8968

Recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations. We use worker-level data from the CPS to measure the sensitivity of wages of newly hired workers to changes in aggregate labor market conditions. The wage of new hires, unlike the aggregate wage, is volatile and responds almost one-to-one to changes in labor productivity. We conclude that there is little evidence for wage stickiness in the data. We also show, however, that a little wage rigidity goes a long way in amplifying the response of job creation to productivity shocks.