Wage Adjustment and Wage Rigidity: Industrial Empirical Analysis of Swedish Economy
Abstract: The main goal of this article is to estimate how the aggregate wage level is determined by the labour productivity and labour market tightness, as well as how the wage is adjusted, at industry level. I collect monthly data from ten industries in Sweden over 2019-2021, and I use an ordinary-least- square method to set up the regression. The results show that wage gap between industries can be explained by industry-level productivity and market tightness differences, however, strong wage rigidity is observed within industries. The aggregate wage level in an industry does not fluctuate as labour productivity does, nor as labour market tightness does. Next, I analyse the labour market of hospitality industry in Sweden, which has suffered most since the outbreak of Covid-19. Despite the enormous reduction in labour productivity, the wage level in hospitality industry did not fall as a response. However, the newly generated vacancies have been sharply reduced in the subsequent months after two pandemic waves. Meanwhile, there were more newly unemployed workers who have worked in hospitality industry, but the negative impact was not strong as the impact on reduced vacancies. Therefore, a reasonable explanation for the wage rigidity during recession is that employers would rather reduce their recruiting activities in the future than have a wage cut, due to fairness consideration. The negative impact on recruitment could probably exist for a long time, likely more than six months.
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