Downward Nominal and Real Wage Rigidity in the Netherlands

During the Great Recession companies were confronted with decreasing demand. One possible strategy to survive instead of cutting down employment, could be to reduce wages. However, it is well known that workers may tend to be reluctant to accept nominal or real wage cuts. In this thesis the amount of downward wage rigidity in the Netherlands is studied. Although substantial research has been performed in recent years, accurate estimates for the Netherlands are currently not available. All previous studies for The Netherlands are outdated (the most recent data is up till 2001) or use survey or aggregated data, while wage rigidity is best studied using administrative data on individual wages to avoid measurement error and the masking of wage cuts of one group of workers by wage increases of others. In this thesis wage rigidity is estimated using administrative data at the individual level. The most notorious problem in estimating wage rigidity is measurement error. Measurement error will lead to spurious (and sometimes negative) wage changes, which could lead to an underestimate of the amount of rigidity. Therefore three methods are used, two of which correct for measurement error. These are the three main approaches well known from the literature that have been developed especially to measure wage rigidity. Also the use of administrative data helps to limit measurement error. Besides presenting up to date estimates of wage rigidity for the Netherlands, this thesis also analyses the determinants of wage rigidity and oers a comparison between three main approaches for estimating wage rigidity. The results of the three methods are found to dier substantially. Estimates for the fraction of wages covered by real wage rigidity range from 10 % up to 67 %. The results of the preferred model-based IWFP method indicate that the amount of real and nominal wage rigidity is about average compared to other countries. Furthermore, my analysis of the determinants of Dutch wage rigidity shows that the presence of wage rigidity is unevenly distributed among groups of workers. I nd that DNWR and DRWR are positively related to a higher age, higher education, open-end contracts, full-time contracts and to working in a rm that experienced zero or positive employment growth in the previous year. Furthermore I nd that large companies have less nominal wage rigidity than small and middle-sized companies, while showing more real wage rigidity. In addition, people with a higher wage show a higher degree of real wage rigidity. I have indications that people working in a shrinking sector province combination are to some extend willing to accept real wage cuts in favor of employment. I also nd that the amount of real wage rigidity decreases and nominal rigidity increases in a low in ation environment.