Downward Stickiness of Wages in Finnish Industries – How Resistant are Wages to Market Pressures?

Introduction

In this paper the wage formation process at the industry level is examined from a particular point of view, namely it is studied whether or not empirical evidence supports either the Keynesian notion of nominal wage stickiness or expected real wage stickiness in Finnish industries. The downward stickiness of wages reflects the ability of labour to resist wage cuts, which may arise from market pressures, at the wage-setting process. The motivation to study this aspect of industry level wage formation stems from our aspiration to identify the forces that affect the variability of wage changes among industries. In particular, if industry level wage formation should show downward stickiness of either nominal or expected real wages, inflation would have an independent role in the explanation of the variability of relative wage changes. The role af inflation in the wage-setting process is important through its effect on the ability of relative wages to allocate labour among firms. If nominal wages are sticky both expected and unexpected inflation affect the allocation whereas if ex ante real wages are sticky only unexpected inflation may have allocational effects. However, this does not mean that the effect of inflation is necessarily employment enhancing. According ta Bell and Freeman (1985) the effect that inflation exerts on employment through relative wages is ambiguous and depends on the particular forces that have changed the wages in different industries.

• ISSN: 0357-9603
• ISBN: 951-9282-01-7