Thursday, December 15, 2011

More Nominal Wage Rigidity

Liam recently posted a Paul Krugman graph showing nominal wage rigidity in Ireland over the last few years. As both noted, this isn’t exactly a shock but the deeper one goes into the data, the wider your eyes are opened.

The relevant are data the Earnings, Hours and Employment Costs Survey (EHECS). Krugman’s figure showed indexed earnings per hour in manufacturing since 2005 Q4. The following shows indexed nominal hourly earnings (excluding irregular bonuses) along with an index of these earnings deflated by the CPI and the indexed number of employees, as per the QNHS. 2008 Q1 is the base for all three.


What I find most interesting is that if we examine sectors which have experienced particularly high levels of job loss, such as construction, there appears to be no softening of this rigidity.


For convenience, figures for other NACE economic sectors are here (pdf).

On a related note, via Marginal Revolution, an interesting paper on wage rigidity in rural Indian labour markets. Abstract:

"Wage and employment responses to rainfall shocks in 500 Indian districts from 1956-2008 provide evidence for downward nominal wage rigidity in markets for casual daily agricultural labor. First, nominal wages rise in response to positive labor demand shocks but do not fall during droughts. Second, after transitory positive shocks have dissipated, nominal wages do not return to their previous levels—they remain high in future years. Third, inflation moderates these effects: when inflation is higher, real wages are more likely to be lower during droughts and after transitory positive shocks. Fourth, wage distortions generate employment distortions: employment is lower in the year after a transitory positive shock than if the positive shock had not occurred. Those with less land, who must sell their labor to other farms, are considerably more likely to face rationing. Landless laborers experience a 7% reduction in employment—twice as large as the employment decrease during a drought. Fifth, there is some evidence that wages are less rigid in areas where rigidity is likely to cause larger profit losses due to crop characteristics. Finally, data from a new survey I conducted in two Indian states suggests that agricultural workers and employers: view nominal wage cuts as unfair; are considerably less likely to regard real wage cuts as unfair if they are achieved through inflation rather than nominal cuts; and believe that nominal wage cuts cause effort reductions."



Kevin Denny said...

Thats very interesting. So what you are suggesting, I think, is that wage relativities across sectors are largely maintained during the recession - all the adjustment is in quantity.

Daniel Davis said...

I was thinking purely about quantity v level choices within sectors facing different conditions but that does seem to be the case with relativities. That makes it all the more curious.

Kevin Denny said...

It could be just insider power or an efficiency wage type story. I don't know how much wages in construction are subject to collective bargaining.