The development of wage dispersion and wage rigidity in Finland

Abstract

Wage dispersion increased during the 1995-2007 period, but it has slowed down or stopped since then. The increase in between-firms variance dominated during late 1990’s, but after that the overall increase in wage dispersion has occurred within-firms. The common picture of Finland as a country with extremely small firm level variation in wages is not quite accurate. For wage changes the between firms share of total variance is much smaller (about half) compared to wage levels, reflecting the relatively small local bargaining element in Finland. The increase in real hourly wages for continuing workers has been around 3% annually, but during the 2010’s the increases dropped below 2 %. The three-year wage growth peaked at 10 % around 2005, dropping to 2 % in 2013. The share of workers experiencing annual real wage cuts has increased during the financial crisis years (in 2011-2012 50-60% of workers experienced real wage cuts). The share of negative deviations from contract wage rises also increased during the financial crisis. All of these developments indicate increasing real wage moderation during the years of financial crisis. There also seems to be some element of individual or local wage setting, which produces smaller wage growth than the contract wage raises for some workers. Applying the methodology developed in the International Wage Flexibility Project (IWFP) to obtain parametric estimates of downward nominal and real wage rigidity, we find that downward real wage rigidity varies between 0.6 and 1 annually, averaging about 0.8 over the years 1995-2013. That is 80 % of workers potentially subject to DRWR, have been affected by it. In contrast to the stability of real wage rigidity, we observe an increasing tendency in the nominal wage rigidity during the financial crisis. The rising downward nominal wage rigidity during recessions seems to limit the size of wage cuts. If nominal wage freeze limits the nominal cuts, then the rate of inflation limits the size of real wage cuts. Therefore, low inflation during the crisis years is one factor limiting the downward adjustment of real wages. Firms have other margins to adjust wage costs in addition to cuts in contractual (hourly) wages in case the firm faces an adverse shock and it needs to adjust its wage bill. Using decompositions we find that overall the primary margin to adjust wage costs in firms is the adjustment of employment, rather than other possible margins, such as hourly wages, overtime or regular working hours, or turnover of employees. Especially wage cuts of existing workers are not used to any substantial amount in order to adjust to negative shocks. Neither do firms on average use overtime hours to adjust their labour input. The firm-level wage-setting curve seems to be very flat. Furthermore, wages increase faster when employment grows, but wage cuts are delayed when employment declines. The effect is asymmetric, as the size of wage cuts is almost half of the wage increases when employment grows.