I am struck by the paper Wage Flexibility and the Great Recession: The Response of the Irish Labour Market (pdf), by Aedín Doris, Donal O’Neill, and Olive Sweetman. The abstract is this:
Despite the importance of wage rigidity in macroeconomic models, no consensus has emerged in the empirical literature on the extent of wage rigidity. Previous attempts to measure wage rigidity have been hampered by small samples and measurement error. Moreover, results relating to earlier periods may not be relevant in the context of the large macroeconomic shocks that have hit many countries in recent years. In this paper we examine nominal wage flexibility in Ireland both in the build up to, and during the Great Recession, using tax return data that are free of reporting error and cover the entire population of workers. The Irish case is particularly interesting because it has been one of the countries most affected by the crisis. We find a substantial degree of downward wage flexibility in Ireland in the pre-crisis period. Furthermore, we observe a significant change in wage dynamics since the crisis began; the proportion of workers receiving wage cuts more than trebled, rising from 17% in 2006 to 56% at the height of the crisis. Given the large number of workers receiving pay cuts it seems unlikely that wage rigidity played an important role in unemployment dynamics in Ireland over this period.
One question is what then caused so much Irish unemployment.
A second question is why Ireland seems to have higher than normal nominal wage flexibility.
Could it be a greater than average willingness to endure living standard cuts without complaining? The Irish after all didn’t protest austerity as much as did most of the other Europeans in a comparable position. Maybe that means their wages can be cut without incurring the same morale costs.
Or could it have something to do with the “dual” nature of the Irish economy, namely that you either work for a multinational or you don’t? If you work for a multinational, maybe they can lower your wages and still you will work hard to keep that job.
Any takers on these questions?