Downward Wage Rigidity and Recession Dynamics in Advanced and Emerging Economies

Downward wage rigidity limits the downward adjustment of wages, especially during recessions. Although macroeconomic models generally suggest that wage rigidity exacerbates employment losses and generates asymmetric business cycles, direct empirical evidence for this effect is scarce. In this paper, we construct a data set covering 53 countries, including both emerging markets and advanced economies, to measure and compare downward wage rigidities across countries. We find that wage rigidities are widespread, but higher in emerging markets overall. In addition, we provide empirical evidence that countries with higher downward wage rigidities are subject to more sizable contractions in employment and real GDP per capita during recessions. We also explore possible determinants of downward wage rigidity and show that our measure is tied to minimum wage growth and de jure labor market rigidity.