Wage Rigidity and Employment Outcomes: Evidence from German Administrative Data

This paper examines the relationship between downward nominal wage rigidity and employment outcomes using a novel linked employer-employee dataset from Germany. The estimates suggest wage rigidity prevents 24.5 percent of counterfactual wage cuts, with a standard deviation of 23.5 percent across establishments. An establishment with the average level of wage rigidity is predicted to have a 0.7 percentage point increase in the layoff rate, a 1.8 percentage point reduction in the quit rate, and a 1.3 percentage point reduction in the hire rate relative to an establishment with no measured wage rigidity. These associations are consistent with the predictions of a structural model. A counterfactual policy simulation suggests that inflation can “grease the wheels” of the labor market by facilitating real wage cuts even when nominal wage cuts are costly to achieve. JEL Codes: E2, E24, E50, J23, J31, J63 You say, ‘We know from repeated experience that the money price of labour never falls till many workmen have been for some time out of work.’ I know no such thing; and, if wages were previously high, I can see no reason whatever why they should not fall before many labourers are thrown out of work. All general reasoning, I apprehend, is in favour of my view of this question, for why should some agree to go without any wages while others were most liberally rewarded? Letter of David Ricardo to Thomas Malthus, 1821