Is Relative Wage Variability Across Finnish Industries Consistent with Downward Stickiness of Wages

Introduction

In economic literature the relati6nship between inflation and relative price variability has been under extensive discussion. Evidence from many countries suggests that in periods of high inflation changes in relative prices tend to be large and vice versa. It has been argued that this result indicates that inflation improves the allocative efficiency of market mechanism. In recent years also the relationship between inflation and relative wage variability has attracted interest.^l Downward stickiness of wages in the wage formation process can be one channel through which inflation has an allocational role in the labour market. If nominal wages are sticky both’expected and unexpected inflation affect the allocation whereas if ex ante real wages are sticky only unexpected inflation has allocational effects. It is, therefore, important to know whether ot not the wage formation process exerts downward stickiness of wages when the role of inflation in the allocation of the labour market is studied. This is what we attempt to do in this paper with Finnish data. First, we try to evaluate the extent of downward stickiness of wages in Finnish industries. Second, we examine whether or not the relative wage variability across Finnish industries is consistent with our evidence on the extent of downward stickiness of wages. Finally, the allocational role of inflation and some other macro-economic factors in the Finnish labour market are discussed.

In Lilja and Santamäki (1988a) the Keynesian nation of nominal wage stickiness and ex ante real wage stickiness in the wage formation process in Finnish industries was first tested. According to this study ratchet effects, which arise from the downward stickiness of wages, could be detected from the industry specific wage equations. In particular, it appeared that hourly wages for the regular working time in manufacturing industries exhibited downward stickiness of ex ante real wages. Furthermore, our evidence suggested that if the wage concept includes many kinds of renumerations from work such as overtime, sickness and holiday pay, then it seems to be easier for the workers to resist decreases in their nominal wage targets. In Chapter 2 of this paper we report updated versions of ratchet model estimations for three different industrial sectors.

In Chapter 3 we examine whether or not the observed changes in the Finnish industrial wage structure are consistent with the notion that there are ratchet effects in the wage formation process. Namely, when ratchet effects exist one can predict how wage structure should change when macro­economic factors affecting the wage growth in the economy change. In previous research the role of inflation has been emphasised in the allocation of the labour market. In Chapter 3 we also evaluate how important some other macro­economic factors have been in the allocation in Finnish industries. In Chapter 4 our findings are summarized.

¹ See Hamermesh (1986), Drazen and Hamermesh (1986), Allen (1987) or Lee (1988) for further discussion.

• ISSN: 0357-9603
• ISBN: 951-9282-23-8