Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2003:10: Endogenous Wage Rigidity

Jonas Agell () and Helge Bennmarker ()
Additional contact information
Jonas Agell: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Helge Bennmarker: Institute for Labour Market Policy Evaluation, Postal: Institute for Labour Market Policy Evaluation, Box 513 , S 75120 Uppsala, Sweden

Abstract: We use a random survey of Swedish human resource managers to study the reasons for wage rigidity. Our findings are as follows. First, during the exceptional recession of the 1990s only 1.1 percent of workers received a wage cut. Second, much wage rigidity can be traced to behavioral mechanisms involving negative reciprocity, relative wage comparisons and money illusion. Third, the reasons for wage rigidity differ significantly between large and small establishments, and between the high- and low-end of the labor market. Fourth, there are significant empirical complementarities between efficiency wage mechanisms and worker bargaining strength, and between “exogenous” institutions and endogenous sources of wage rigidity. Fifth, external pay comparisons are a more important source of rigidity in highly unionized establishments. Sixth, there are significant gender differences in pay bargaining and work moral.

Keywords: wage rigidity; survey evidence; matched data; reciprocity; behavioral macroeconomics; labor law

JEL-codes: C81; E24; J30; J50

40 pages, August 21, 2003

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