If wages are more rigid downward than upward, then unemployment is volatile during recessions. In benchmark models, the wage for new hires is particularly important for unemployment fluctuations, but there is limited evidence of downward rigidity on this margin. We introduce a dataset that tracks the wage for new hires at the job level—that is, across successive vacancies posted by the same job title and establishment. We show that the wage for new hires is more rigid downward than upward, in two steps. First, the nominal wage rarely changes at the job level. When wages do change, they fall infrequently, suggesting a constraint from beneath. Second, when unemployment rises, wages do not fall for new hires—though wages rise strongly as unemployment falls. We show that prior work, which studies the average wage for new hires, cannot detect downward rigidity due to changing job composition. Finally, we match a standard labor search model to our estimates, and uncover state dependent asymmetry in unemployment dynamics. After contractions, unemployment responds symmetrically to labor demand shocks; after persistent expansions, unemployment is as much as twice as sensitive to negative than positive shocks.
It is a true puzzle why the wage should be sticky for employment relations which do not yet exist! (It is easier to see you might not cut wages for workers who had prior expectations and who will stick around and might wreck things due to being disgruntled.)
Do note this:
However the average wage for new hires, the object of previous studies, is not more rigid downward than upward—in contrast to our job- and establishment-level results on downward rigidity…
But note that in section 6.2 the paper shows that firms do not lower the average quality of job during a recession so as to lower the average wage offer — yet a further puzzle. Section 6.3 considers whether quality of job reallocation across establishments might offset wage rigidity.
This paper raises many important questions, and it is the most significant progress on understanding wage rigidity I have seen since the questionnaire work of Alan Blinder and also Truman Bewley.
Recommended, both the paper and the job candidate!
Addendum: Note this earlier post of Alex’s, on workers moving to new jobs since the end of the recession.