Wage Shocks Research Articles

Long-term responses to large minimum wage shocks: Subminimum and super-minimum workers in Slovenia

This study examines long-term effects of a large minimum wage increase in Slovenia, covering the universe of employed and unemployed workers. By distinguishing subminimum and super-minimum workers, we find large, persistent disemployment effects for the subminimum group whose productivity fell below the rising minimum wage, both due to lower probability of remaining employed and of finding a job if non-employed. The shock to firm wage bills caused by the minimum wage creates a substitution toward workers whose marginal revenue products are slightly above the minimum wage, but the most skilled are complements with the subminimum workers in their firm.

Labour Productivity, Wages, and Inflation: Evidence from Selected Central and South-East European Countries

The relationship between inflation, worker wages, and labour productivity growth has been a widely discussed topic among academics in recent decades. Labour productivity is a critical component for maintaining and improving the competitiveness of national economies and establishing sustainable economic growth. The increase in labour productivity serves as the foundation for increasing workers' wages, thereby enhancing their purchasing power and overall well-being. However, empirical data from Southeast European countries indicate that labour productivity growth rates have been insufficient to enable catch-up with their Western European counterparts. Additionally, these countries have experienced significant inflation rates in recent years, resulting in a notable decline in real wages for workers. Therefore, the gap between labour productivity and workers' wages has not only failed to diminish but has, in fact, widened over the past few decades.
 The primary objective of this paper is to examine the interrelationships among labour productivity, workers' wages, and inflation in Central and Southeast European countries, specifically the Balkan EU countries, Balkan non-EU countries, and the Visegrád group of countries. The findings reveal a short-term causality among inflation, labour productivity, and the statutory minimum wage in these three groups of countries. Furthermore, there is evidence of a bidirectional causal relationship running from the minimum wage and inflation to labour productivity, and vice versa, in the short term. Additionally, the introduction of a minimum wage shock significantly influences the future values of labour productivity and inflation. The adverse effects of an externally induced increase in the statutory minimum wage are particularly noticeable in Western Balkan non-EU countries.

Gender Wage Ratio and Intra-household Resources Allocation in China: Evidence from the China Health and Nutrition Survey

The gender wage gap is a critical measurement of gender equality in the labor market. On the demand side in the labor market, gender differences in labor pricing can shape the household decision regarding intra-household resource allocation. Understanding how labor pricing, namely wages, affects the resources allocated to women is important to improve womens welfare in developing countries. Previous research focuses on the effects of gender norms in China, such as son preferences, on intra-household resource allocation. This paper examines how the gender wage gap affects the resources allocated to women within the household. To capture the wage shock in the labor market, I construct the gender- specific Bartik variables. The results indicate that the increases in female-to-male wages between couples improve womens nutrition intake. This work serves to inform about improving womens welfare in the family and labor market.

What we pay in the shadows: Labor tax evasion, minimum wage hike and employment

The interactions between minimum wage policy and tax evasion remain largely unknown. We study the firm-level employment effects of a large and biting minimum wage increase in the context of widespread wage underreporting. We apply machine learning to classify firms as either tax-compliant or tax-evading. We then show that firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results indicate that these firms use wage underreporting as an adjustment margin, converting part of their formerly undeclared cash payments into official wages. Increasing the minimum wage improves tax enforcement, but comes at the cost of negative employment consequences for compliant firms.

Dissecting Idiosyncratic Earnings Risk

Abstract This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) Both wages and hours contribute to negative skewness and high kurtosis for earnings changes, although hour-wage interactions are quantitatively more important. (iv) When considering household earnings and disposable household income, the deviations from normality are mitigated relative to individual labor earnings: changes in disposable household income are approximately symmetric and less leptokurtic.

Hours risk and wage risk: repercussions over the life cycle*

AbstractWe decompose earnings risk into contributions from hours and wage shocks. To distinguish between hours shocks, modeled as innovations to the marginal disutility of work, and labor supply reactions to wage shocks, we formulate a life‐cycle model of consumption and labor supply. For estimation, we use data on married American men from the Panel Study of Income Dynamics. Permanent wage shocks explain 31 percent of total risk, permanent hours shocks 21 percent. Progressive taxation attenuates cross‐sectional earnings risk, but its life‐cycle insurance impact is much smaller. At the mean, a one‐standard‐deviation hours shock raises lifetime income by 11 percent, a wage shock by 13 percent.

Estimation of smoothing of consumer expenditures of Kazakhstan citizens and their chances to increase the demand for credit resources

The decline in the level of well-being of the population has been observed in recent years in some countries of the near and far abroad, as well as the growth of debt obligations of individuals to second-tier banks. Various indicators are taken as the level of well-being of the population in foreign researches in order to verify these statements. The ability of individuals and households to smooth out consumer spending in response to temporary rather than permanent income shocks is one of the key determinants of well-being according to the permanent income hypothesis and life cycle theory. In this regard, the ability of Kazakhstan citizens to smooth out consumer spending in response to shocks in employment, wages, debt burden and changes in temporary income are studied, as well as the chances of an increase in applications of Kazakhstan citizens for credit resources to second-tier banks are assessed in the presented article. Data for 16 regions of Kazakhstan for 2003–2020 are used to calculate coefficient estimates for the variables of interest. The results obtained indicate the ability of Kazakhstan citizens to smooth out approximately 7 % of temporary income. Meanwhile, negative employment shocks contribute to a 0,22 % reduction in consumer spending, ceteris paribus. The level of education and the average age of Kazakhstan citizens have a positive effect on the growth of consumer spending. It should be noted that the average age in Kazakhstan is lower than in European countries. The economically active population of Kazakhstan are not inclined to increase the demand for credit resources in second-tier banks in response to negative wage shocks. The results of the research indicate the financial stability of second-tier banks in Kazakhstan. At the same time, the financial stability of banks are achieved by gradually reducing the volume of loans to individuals.

Specialists or generalists? Cross-industry mobility and wages

This paper quantifies the association between industrial specialization at the occupation level and job mobility and earnings for low and middle-wage American workers. I propose the concept of industry specificity to capture the degree of industrial specialization of a worker's occupation. I measure industry specificity using an index of industrial concentration of employment (CEI) defined at the occupation-state-year level. Linking this index to individual-level panel data on wages and job transitions, I show that CEI is negatively associated with workers' wages: moving from the first quartile to the third quartile of industry specificity decreases wages by 13 percent. I next examine the mechanisms that explain these findings. I first find that CEI is negatively associated with cross-industry and cross-occupation mobility, that is, workers employed in industry-specific occupations change industry and occupation less frequently than workers in less specific occupations. In addition, I show that occupation-level factors such as skill uniqueness and automatability increase industry specificity; but they cannot entirely explain the negative effect of CEI on wages. Finally, in line with the main results, I provide suggestive evidence that workers in industry-specific occupations are more vulnerable to industry-wide wage shocks compared to their generalist counterparts.

What We Pay in the Shadow: Labor Tax Evasion, Minimum Wage Hike and Employment

The interactions between minimum wage policy and tax evasion remain largely unknown. We study firm-level employment effects of a large and biting minimum wage increase in Latvia conditional on labor tax compliance. The Latvian labor market is characterized by the prevalence of envelope wages, i.e., unreported cash-in-hand complements to the official wage. We apply machine learning to classify firms between compliant and tax-evading using a unique combination of administrative and survey data. We then show that firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results suggest that these firms use wage underreporting as an adjustment margin, converting (part of ) the envelope into legal wage. Increasing minimum wage contributes to tax rule enforcement, but this comes at the cost of negative employment consequences for compliant firms.

A Time-Varying Connectedness Analysis of the Korean Economy

We examine time-varying connectedness among Korea’s macroeconomic variables with a special focus on whether there are structural changes among macro variables between beforeand after-Covid19 periods. From total connectedness analysis, we found that the connectedness among macro variables intensified after Covid-19. From “NET” connectedness analysis, we also found that employment shock affects other variables more than other shocks affect employment and that wage is affected by other shocks more than its shock affect other variables after Covid-19 pandemic. Net pairwise directional connectedness analysis reveals that the sign of net effect reversed between (1) total hours worked and employment, and (2) wage and employment after Covid-19. Finally, network graphs of net pairwise directed connectedness, based on the relative strength of connectedness, show that wage shock strongly affect production. CPI also affects the production while it is also affected by interest rate shock. Employment shock has significant effect on interest rate. We also provide the policy implications based on the connectedness analysis.

Macroeconomic Effects of Covid-19 in a Commodity-Exporting Economy: Evidence from Mongolia

ABSTRACT This article examines macroeconomic effects and transmission mechanisms of Covid-19 in Mongolia, a developing and commodity-exporting economy, by estimating a Bayesian structural vector autoregression on quarterly data. We find strong cross-border spillover effects of Covid-19 passing through changes in commodity markets and the Chinese economy. Our estimates suggest that China’s GDP and copper price shocks respectively account for three-fifths and one-fifths of the drop in real GDP in 2020Q1. The recovery observed for 2020Q2-2021Q1 is primarily due to positive external shocks. However, disruptions in credit and labor markets have been sustained in the economy. Two-thirds of the fall in employment in 2021Q1 could be attributed to adverse labor demand shocks. We also reveal novel empirical evidence for the balance sheet channel of the exchange rate, the financial accelerator effects, and an indirect channel of wage shock to consumer price passing through bank credit.

SUSTENANCE AND STRIFE. STANDARDS OF LIVING AND FAMILY VULNERABILITY DURING SPAIN'S INDUSTRIALISATION. THE BILBAO ESTUARY, 1914-1935

ABSTRACTDid industrialisation improve standards of living in interwar industrial Spain? We seek to contrast this empirically with high frequency data from 1914 until 1936 for the Bilbao area, an emerging industrial centre. Contrary to existing historiography suggesting that overall standards of living improved, we find that welfare ratios remained at the same level and, at times, fluctuated significantly below sustenance levels. Demographic and socioeconomic variables were highly responsive to short-term real wage shocks driven by food price increases and the delay in nominal wage increases. Interwar industrialisation provided improvements, but did not provide protection from recurring deprivations and these may have constituted an important part of future political and socioeconomic polarisation and violence.

District attorney compensation and performance

We attempt to identify the causal effect of wages on a prosecutor’s effort by studying an exogenous salary increase in New York. We measure the performance by the likelihood that a conviction is upheld when appealed. If the efficiency wage theory explains behavior, then the exogenous wage shock should entice better performance. Alternatively, if individuals who hold office are motivated primarily by an intrinsic motivations rather than strictly financial compensation, then their performance would be unrelated to changes in their salary. We mostly find, inconsistent with efficiency wage theory, that a pay increase has a null effect on prosecutor performance.

Business Cycle Implications of Firm Market Power in Labor and Product Markets

In this paper, we analyze the business cycle implications of firms having oligopsony power in labor markets, as well as oligopoly power in product markets, within the context of a New Keynesian dynamic stochastic general equilibrium model with firm entry and exit. Relative to the standard setup with monopolistic competition in both goods and labor markets, the strategic interaction between intermediate goods firms in the current setup results in larger price markups as well as wage markdowns, while the slopes of the aggregate price and wage Phillips curves become flatter. These effects are strengthened in a strongly non-linear fashion as the number of firms in each sector decline. Oligopsonistic labor markets also render wage shocks expansionary, unlike in the standard setup. Results indicate that a secular increase in industry concentration would not only reduce the labor share of income, but also weaken the pass-through from firms' marginal costs to prices and from productivity increases to real wages.

Wage growth and inflation in Europe: a puzzle?

Abstract In many European countries, prior to the pandemic, wages rose faster than productivity, yet consumer price pressures remained subdued. This is puzzling as theory suggests that inflation would pick up with a rise in wage growth that exceeds productivity growth. To shed light on this puzzle, we analyze the transmission of wage shocks to core inflation for a sample of 27 European countries over the period 1995Q1–2019Q1. More importantly, we assess how the transmission depends on a set of factors. We find that historically wage growth has led to higher inflation but the impact has weakened since the global financial crisis. Our analysis shows that the passthrough from wage growth to inflation is significantly lower in periods of subdued inflation and inflation expectations, greater competitive pressures, and robust corporate profitability.

Farm wage and Rice Price dynamics in Bangladesh

Empirical findings explaining the wage-price nexus in Bangladesh are diverse and conflicting. A proper understanding of the relationship between food prices and farm wages is essential for planning policies in support of the wellbeing and food security of the rural poor. In exploring the link between food prices and rising agricultural wages, this study analyzes the dynamic relations between those two by using monthly data from 1994 to 2014. A standard vector error correction model (VECM) is implemented to determine the short-run and long-run relationships between wages and food prices in eight divisions in Bangladesh. In addition, we use autoregressive distributed lag (ARDL) models to estimate the pass-through coefficients and to compare the short-run effects of rice price and urban wage shocks on agricultural wages. We find statistical evidence for a structural break between January 2007 and January 2009 in the relationships of the variables in all divisions. Different to the period until 2007/2009, after the structural break, in six out of eight divisions, rice price shocks do not transmit to the farm wages in the short-run. Moreover, our findings show that in the long-run food prices have become less influential in explaining the changes in farm wages while the influence of urban wages has become stronger in some divisions.

Shocking gift exchange

We study how a gift exchange labor market reacts to the occurrence of negative shocks. One-round shocks may hit either workers’ wages or employers’ earnings (via worker productivity). In our model, other-regarding preferences suffice to predict gift exchange and wages above the competitive level. Wage rigidity is predicted if we add wage illusion and loss aversion. Using a real-effort laboratory experiment, we find support for the model. When there are no shocks, there is gift exchange. After a wage shock we see strong nominal wage rigidity and no impact on workers’ effort, as predicted. Rigidity is also observed after a productivity shock, but here we do observe increases in effort, especially at low wages. The latter is contrary to the model predictions and suggests that productivity shocks alter gift-exchange patterns. We conclude that the wage rigidity often observed in the field can be explained by boundedly rational workers with social preferences.

Consumption inequality across heterogeneous families

What does preference heterogeneity imply for consumption inequality? This paper studies the link from wage to consumption inequality within a lifecycle model of consumption and family labor supply. Its distinctive feature is that households have general heterogeneous preferences over consumption and labor supply. The paper shows identification of the joint distribution of unobserved household preferences separately from the observed distributions of incomes and outcomes. Estimation on data from the Panel Study of Income Dynamics in the US reveals substantial unexplained heterogeneity in consumption preferences but little unexplained heterogeneity in labor supply preferences. Preference heterogeneity accounts for about a third of consumption inequality in recent years and implies, on average, lower partial insurance of wage shocks compared to recent studies in the literature.

Search Frictions and Evolving Labour Market Dynamics

This paper puts Search Frictions models under novel empirical scrutiny. To capture changing dynamics, we fit a Bayesian time-varying parameter VAR to US labour market data from 1965–2016. Using a DSGE model with Search Frictions, we identify several structural shocks, including a shock to worker bargaining power that we name a wage shock. We argue that the wage shock is a key driver of cyclical variation, explaining a higher proportion of the variation of these variables than productivity, demand or job separation shocks. We also document stark differences between empirical and theoretical impulse response functions that cast doubt on the core transmission mechanism of search and matching models.

Shocks, financial constraints and households’ consumption amid the great recession

Overall, there is now considerable evidence that financial constraints are at the root of the lack of consumption smoothing during the Great Recession. We push this evidence forward and show that in the presence of credit constraints, a job loss leads to larger drops in households? consumption. We build a set of testable hypotheses from our theoretical model and employ microdata taken from the second round of the Life in Transition Survey (LiTS II) (European Bank for Reconstruction and Development 2010). We specifically assess the role of financial constraints in explaining households? consumption coping strategies after the crisis shocks. Economic hardship is more likely to be observed if households experience difficulties in meeting outstanding debt obligations or in obtaining new credit lines because of financial constraints. The impact of job and wage shocks on households? consumption is much attenuated, by around a half, when we control for sample selection bias in accessing the formal credit markets. In the context of increasing impoverishment across Europe, the paper shows that a careful analysis of the main determinants of households? economic and financial hardship is crucial to formulate targeted measures at the regional and local level.