Business Intelligence

How Wages Respond To Shocks: Asymmetry In The Speed Of Adjustment

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Executive Summary

The time series of various economic variables often exhibit asymmetry: decreases in the values tend to be sharp and fast, whereas increases usually occur slowly and gradually. The authors detect signs of an analogous asymmetry in firms' wage setting behaviour on the basis of managerial surveys, with employers tending to react faster to negative than to positive shocks in the same variables. As well as describing the presence of asymmetry in the speed of wage adjustment, they investigate which companies are more likely to demonstrate it in their behaviour. For this purpose, they apply the Heckman selection model and develop a methodology that improves identification by exploiting heteroscedasticity in the selection equation.

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