Wage rigidity at the micro-level in the European Union's countries : evidence and estimation issues

Dessy, Orietta (2004) Wage rigidity at the micro-level in the European Union's countries : evidence and estimation issues. University of Southampton, Doctoral Thesis.

Record type: Thesis (Doctoral)

Abstract

In this thesis we analyse the extent of wage rigidity in the European countries using data at the micro-level. After an extensive survey of the literature, we provide evidence of nominal wage rigidity in 14 EU countries using the individual surveys of the 1994-2000 European Community Household Panel. We follow both a descriptive and an econometric approach, taking into account reporting error issues in constructing appropriate measures of downward nominal wage rigidity. We find that the extent of nominal wage rigidity observed increases when reporting errors are modelled according to the classical assumptions. Therefore nominal wages are quite rigid in the EU countries, although measures are different across countries.

We therefore move to try to explore the causes of wage rigidity in Europe, focusing on the institutional characteristics of labour markets. We find that there is an hump-shaped relationship between employment protection legislation and nominal wage flexibility measures.

Then the French case is analysed in detail, comparing data of different nature (declarative and administrative). A validation study is carried out for the French Labour Force Survey (FLFS), showing that rounding behaviour of individuals does not follow the classical assumptions. This has an impact on the observed measures of wage rigidity: whereas the observed extent of wage rigidity in France is quite high in the FLFS, no evidence of wage rigidity is found in administrative data.

In the last chapter we question the appropriateness of measures of wage rigidity based only on individual data, and construct an appropriate matched employer-employee data set for France that allows to link individuals wage dynamics to measures of idiosyncratic, firm-level shocks. We therefore define wage rigidity as asymmetric adjustments of wages to firm-level shocks. Testing this definition on French data we conclude that, although the reporting-error free distribution of wage changes does not show evidence of wage rigidity in France, wage react asymmetrically to positive and negative shocks. Therefore, according to a more general definition, nominal wages are rigid in France.

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