Vol. 29, No. 1

Jari Vainiomäki:

The Development of Wage Dispersion and Wage Rigidity in Finland

This paper examines the development of wage dispersion and wage rigidity in Finland. We find that while labour market institutions remained stable they allowed for wage dispersion to increase both within and between firms. Different from many other countries the within firms increase has dominated during the last decade. Second, using the methods developed in the International Wage Flexibility Project (IWFP), we find that micro-level real wage rigidity has remained as high as in the 1980’s and 1990’s but nominal rigidity rose after the financial crisis of the late 2000’s. These rigidities together with low inflation have prevented real wage adjustment downwards particularly during the Great Recession. Finally, we find that the primary margin to adjust wage costs in firms is the adjustment of employment, rather than hourly wages, overtime or regular working hours, or turnover of employees. Furthermore, firm-level wages are very sticky in the face of firm-level employment shocks. Local wage cuts are delayed and muted when employment declines, compared to wage growth.

(JEL: J31)

Accepted, forthcoming in Finnish Economic Papers