Discussion paper

DP13407 The Cost of Wage Rigidity

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.

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Citation

Faia, E and V Pezone (eds) (2018), “DP13407 The Cost of Wage Rigidity”, CEPR Press Discussion Paper No. 13407. https://cepr.org/publications/dp13407