Upward Nominal Wage Rigidity

33 Pages Posted: 5 Feb 2017

See all articles by Paulo Guimaraes

Paulo Guimaraes

University of South Carolina - Darla Moore School of Business; IZA Institute of Labor Economics

Fernando Martins

Bank of Portugal - Research Department; University of Lisbon - School of Economics and Management; Universidade Lusíada, Lisboa

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

Abstract

In Portugal, as in many other countries in continental Europe, the collective wage agreements between trade unions and employer associations that define wage floors for specific job titles are systematically extended to the whole industry. This means that many firms are obliged to increase the wages of their workforce in order to comply with the newly-agreed bargained wages. With some trepidation, we call this phenomenon upward nominal wage rigidity, in close symmetry with the Keynesian notion of downward nominal wage rigidity. In this paper we provide evidence that firms that are more heavily affected by the change in the bargained wage floors decrease their hiring rates and, more importantly, significantly increase their separation rates. As a complement to our analysis, we suggest the estimation of a measure that attempts to disentangle the strength of internal and external wage conditions. Based on this measure we show that firms whose wages are more influenced by external wages exhibit much lower net job creation rates.

Keywords: wage rigidity, worker flows, collective bargaining, newly-hired workers

JEL Classification: J31, J52, J23

Suggested Citation

Guimaraes, Paulo and Martins, Fernando and Portugal, Pedro, Upward Nominal Wage Rigidity. IZA Discussion Paper No. 10510, Available at SSRN: https://ssrn.com/abstract=2911408

Paulo Guimaraes (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Fernando Martins

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal

University of Lisbon - School of Economics and Management ( email )

Rua do Quelhas, n.º 6
Lisbon, 1200-781
Portugal

Universidade Lusíada, Lisboa ( email )

Rua da Junqueira, 188 - 198
Lisboa, 1349-001
Portugal

Pedro Portugal

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085
Portugal

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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