Working Paper

Downward Wage Rigidities and Recession Dynamics in Advanced and Emerging Economies*

Abstract: Downward wage rigidity limits the downward adjustment of wages, especially during recessions. Although macroeconomic models generally suggest that wage rigidity exacerbates employment losses and generates asymmetric business cycles, direct empirical evidence is scarce. In this paper, we construct a data set covering 53 countries, including both emerging markets and advanced economies, to measure and compare downward real wage rigidities across countries. We find that wage rigidities are widespread, but overall higher in emerging markets. We provide empirical evidence that countries with higher downward wage rigidities are subject to more sizable contractions in employment and real GDP per capita during recessions. Finally, we show that our downward wage rigidity measure is closely related to minimum wage growth and de jure labor-market rigidity measures but has very different effects from labor unions on employment during recessions.

Keywords: Wages; Recession; Unemployment;

JEL Classification: F41; E23; E24; E32; J31; J50;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2022-09-02

Number: RWP 22-10