Micro and Macro Level Wage Rigidity: Lessons from Finland

The paper explores wage flexibility in Finland. The study covers the private sector workers by using three data sets from the payroll records of employers’ associations. The data span the period 1985–2001. The results reveal that there has been macroeconomic flexibility in the labour market. Average real wages declined during the depression of the early 1990s and a large proportion of workers experienced real wage cuts. However, the evidence based on individual-level wage change distributions shows that real wages, especially, are rigid downwards. In particular, during the late 1990s, individual-level wage changes regained the high levels of real rigidity that prevailed in the 1980s, despite the continued high (but declining) level of unemployment.