4/2011 Tairi Rõõm and Aurelijus Dabušinskas. How wages respond to shocks: Asymmetry in the speed of adjustment

Working Papers of Eesti Pank. No. 4/2011

The time series of various economic variables often exhibit asymmetry: decreases in the values tend to be sharp and fast, whereas increases usually occur slowly and gradually. We detect signs of an analogous asymmetry in firms' wage setting behaviour on the basis of managerial surveys, with employers tending to react faster to negative than to positive shocks in the same variables. As well as describing the presence of asymmetry in the speed of wage adjustment, we investigate which companies are more likely to demonstrate it in their behaviour. For this purpose, we apply the Heckman selection model and develop a methodology that improves identification by exploiting heteroscedasticity in the selection equation. The estimation results imply that companies operating in a more competitive environment have a higher propensity to react asymmetrically. We also find that businesses relying on labour-intensive production technology are more likely to react faster to negative shocks. Both of these findings support the hypothesis that this behaviour results from companies' attempts to protect profit margins.
JEL Code: J30, J31, J33
Key words: wage dynamics, asymmetry, wage setting, survey

* The work was conducted within the framework of the Wage Dynamics Network coordinated by the European Central Bank. We thank Dmitry Kulikov, Karsten Staehr and seminar participants at the Eesti Pank for helpful comments.

Authors' e-mail addresses: tairi.room [at] eestipank.ee, aurelijus.dabusinskas [at] eestipank.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. Overview of the related literature: asymmetric reaction speed in price setting
3. Characteristics of the Estonian labour market that are associated with asymmetric reaction
4. Data description
5. Asymmetries in wage setting
5.1. First asymmetry: companies react faster to negative shocks
5.2. Second asymmetry: companies react more likely to shocks that lead to wage increases
5.3. Reaction speed to shocks
6. Asymmetric reaction speed: regression analysis
6.1. Estimation methodology
6.2. Estimation results: separate regressions for each type of shocks
6.3. Estimation results: combined variable of asymmetric reaction
7. Conclusions
References
Appendix 1. Stratification and sample structure
Appendix 2. Description of the survey question on reaction speed to shocks
Appendix 3. Main economic indicators of the Estonian economy, 1997-2009
Appendix 4. Asymmetric reaction speed to shocks
Appendix 5. Asymmetric reaction probability to shocks
Appendix 6. Distribution of reaction speed
Appendix 7. Differences in unconditional sample means: firms that react asymmetrically vs. other companies
Appendix 8. Probit and Heckman probit regressions: separate regressions for shocks in different variables
Appendix 9. Probit and Heckman probit regressions: combined measure of asymmetric reaction

How wages respond to shocks: asymmetry in the speed of adjustment, Working Papers of Eesti Pank No 4/2011 (PDF)