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RWP 22-10, September 2022

Downward wage rigidity limits the 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.

JEL classifications: F41, E23, E24, E32, J31, J50

Article Citation

  • Matschke, Johannes, and Jun Nie. 2022. “Downward Wage Rigidity and Recession Dynamics in Advanced and Emerging Economies.” Federal Reserve Bank of Kansas City, Research Working Paper no. 22-10, September. Available at External Linkhttps://doi.org/10.18651/RWP2022-10

Authors

Johannes Matschke

Economist

Johannes Matschke is an economist in the Macroeconomics and Monetary Policy Division at the Federal Reserve Bank of Kansas City. He joined the Bank in 2021 after obtaining his Ph…

Jun Nie

Senior Economist

Jun Nie is a Senior Economist in the Economic Research Department of the Federal Reserve Bank of Kansas City. He received his M.A. and Ph.D. from New York University, and earned …