The Importance of Sticky Wages

In the average three-month period, the probability of a nominal wage change is 18 percent for workers who are paid by the hour.

Wages are "sticky" if employers are slow to adjust them in response to changing economic conditions. In Some Evidence on the Importance of Sticky Wages (NBER Working Paper No. 16130), co-authors Alessandro Barattieri, Susanto Basu, and Peter Gottschalk analyze data on U.S. wages, employment, and demographic characteristics for the period 1996-9 from the Survey of Income and Program Participation. The authors find that in the average three-month period, the probability of a nominal wage change is 18 percent for workers who are paid by the hour. For salaried workers, the probability drops to 5 percent.

The frequency of wage adjustment does not vary substantially across industries or occupations, they find. Moreover, despite some evidence of minor seasonal patterns, the frequency of wage adjustment does not change significantly throughout the year. That is, there is no specific time during the year when an individual is most likely to experience a wage change. Individual wages usually are adjusted once a year, but because different employers make these adjustments at different times, wage changes at the economy-wide level are spread throughout the year.

Some macroeconomic variables do appear to influence the likelihood of wage changes. For example, both an increase in the consumer price inflation rate and a rise in the unemployment rate are associated with increases in the probability of wage adjustment.

--Claire Brunel