The International Wage Flexibility Project

1. The International Wage Flexibility Project Presentation at Workshop on Downward Nominal Wage Rigidity Norges Bank, 12 June 2003

2. What? 13 Country study of wage inflation Using micro data on individual and occupational wages Intent is to study the nature, extent, and implications of wage rigidity in the presence and absence of inflation

3. Country Teams Austria Belgium Denmark Finland France Germany Italy Norway Portugal Sweden Switzerland United Kingdom United States

4. Who Is On Norwegian Team? Jan Morten Drystad Norwegian Institute of Science and Technology Steinar Holden University of Oslo Kjell Salvanes Norwegian School of Economics and Business

5. Starting Point for Some History: G&S Groshen and Schweitzer / Grease and Sand As some have suggested, inflation may �grease� economy and facilitate relative price adjustment On the other hand, inflation may distort usefulness of price signals thus fouling the works (�sand�)

6. What Groshen and Schweitzer Did Analyze firm level data on wages paid in different occupations. Estimate an analysis of variance model of within firm occupational wage changes with firm and occupation effects (ie. regression with firm and occupation dummy variables).

7. What they Were Looking For If firms make more errors in setting wages when inflation is high, the variance of the coefficients on the firm dummies should grow with the rate of inflation. If inflation facilitates relative wage adjustments then the variance of the coefficients on the occupation dummies should increase with inflation.

8. What They Found Both the variance of the coefficients of occupations and firms increased with inflation Welfare effects of sand and grease comparable and roughly offsetting Several tests suggest the identification strategy is appropriate

9. History of Project(continued) Erica and Mark begin recruiting project teams (Fall 2000). Erica and Mark share plans for project with me and I suggest broadening the range of questions to be addressed (Winter 2001)

10. History of Project(continued) I�m invited to help with project planning In line with new concept of project we recruit additional country teams Organizational meeting held at ECB 22-23 October 2001

11. At The Meeting Country teams presented: descriptions of data available descriptions of wage setting institutions preliminary attempts to replicate Groshen- Schweitzer wage change histograms Some Very Interesting Patterns Emerged

12. Observations Preliminary analysis suggested sand more important than grease, but data weren�t uniformly good for replication of G-S (few and inconsistent occupational categories) Nearly all countries had micro data on individual wage histories Several country teams expressed concern that G-S identification strategy wouldn�t work given their wage setting institutions It became clear that focusing on Sand and Grease alone would miss much of what is important about wage rigidity in Europe.

17. Five Types of Wage Rigidity Nominal Rigidity Menu costs Downward nominal rigidity Real Rigidity Downward real rigidity Insensitivity to fundamentals (unemployment and productivity) Bargained or legislated wage floors

19. First Attempt To Estimate Rigidity Had Several Problems We tried to adapt Altonji and Deveraux ML method to include real rigidity Couldn�t tell real rigidity or measurement error from non-normality in notional wage distribution (this became obvious at authors� meeting in Bonn last October). Also, discussions at meeting last fall suggested that in many countries real rigidity didn�t take form assumed in model.

20. New ApproachUse information in correlation between years Abowd and Card (1989) suggest that wage changes have two components: permanent changes transient (one period) changes (which result in negative serial correlation of wage changes) New method identifies transient changes as errors and uses covariance and frequency of sign switching in changes to identify error rate and error variance. This information is used to identify non-parametric estimate of true wage distribution.

21. Validating Primary Assumption Results for US largely fit with those of other studies (nearly complete downward nominal rigidity). German data has virtually no errors and estimated covariances are tiny and sometimes positive (implied sd of error when cov < 0 is about 1.5%) Will shortly check time series properties of Gottschalk true wage changes.

24. Example Using PSID Datat Only wage earners Use reported wages and not PSID computed wages

29. Nominal Rigidity Estimates Spike vs tail (with and without correction for menu costs) Lower tail vs. upper tail (symmetry) Below zero vs. same category above zero in another year (constant distribution as in Kahn (1997) -- not yet implemented)

30. Menu Cost Rigidity Categories around zero vs. reflection to other side of median (symmetry) Categories around zero vs. same categories in other years when they aren�t around zero (constant notional distribution Kahn)

31. Real Rigidity Downward real rigidity by symmetry method (use different estimates of expected rate of inflation and compare mass below to mass above) Downward nominal by constant distribution (estimate reduction in mass by contrasting values in different periods -- not yet implemented). Asymmetry: After removing spike measure skew measure difference between mean and median excess mass in spikes other than zero

32. Real Rigidity:Insensitivity to Fundamentals Estimate Phillips Curve with median instead of mean Estimate mean of notional wage distribution using modified Kahn method

35. Real Rigidity Measures

36. What�s Next? Country Teams finish descriptions of wage setting institutions replications of G-S (where possible) histograms of wage change distributions for each year data are available discussion of data reliability run program to do rigidity estimates unique country projects

37. What�s Next (continued) Project leaders, in cooperation with country teams, develop hypothesis about institutional sources of rigidity develop data set on institutions panel meta-analysis of causes and consequences of rigidity and sand Culminating in meeting in Winter 2003