Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index

We examine the extent of downward nominal wage rigidity using the microdata underlying the BLS's employment cost index. This dataset has two significant advantages over those used previously. It is an extensive, nationally representative dataset based on establishment records and is thus free from much of the reporting error that has plagued earlier work. Even more important, the data are unique in containing detailed information on benefit costs, allowing a first look at the rigidity of total compensation (that is, wages plus benefits). In general, we find significantly stronger evidence of downward nominal wage rigidity than did studies using panel data on individuals. Although total compensation appears somewhat more flexible than wages and salaries alone, we still find a significant amount of rigidity for compensation. Furthermore, the greater flexibility of compensation does not seem to reflect the deliberate attempt by firms to use benefits to circumvent wage and salary rigidity.