The extent and nature of downward nominal wage flexibility: An analysis of longitudinal worker/establishment data from Korea

Abstract

Analysis of a special dataset constructed from the Survey on Labor Conditions by Type of Employment finds evidence that does not support the downward nominal wage rigidity hypothesis during the 2008–2009 through 2012–2013 period, which was a period of low inflation and low economic growth. Our analysis finds at least one in every four job stayers experienced nominal wage cuts from one year to the next, and few experienced nominal wage freezes. The extent of downward nominal wage flexibility is somewhat greater in Korea than in Great Britain and the United States, which have the most flexible labor markets among OECD countries. Our analysis at the establishment level uncovers the nature of this downward nominal wage flexibility. The observed downward flexibility does not result from a fraction of employers cutting most of their workers’ wages, but from a majority of employers cutting a fraction of their workers’ wages fairly routinely. The size of nominal wage reductions is substantial. In addition, employers tend to ‘choose’ high wage earners for wage cuts.