Determinants of wage stickiness in a developing economy |
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| Institution: | 1. University of Surrey, Guildford, Surrey GU2 7XH, United Kingdom;2. Research Department, State Bank of Pakistan, I.I. Chundrigar Road, Karachi 74000, Pakistan;3. Department of Economics, University of Iceland, 101 Reykjavik, Iceland;4. Birkbeck College, University of London, Malet Street, London WC1E 7HX, United Kingdom;1. Institute for Agricultural Policy and Market Research, University of Giessen, Senckenbergstr. 3, 35390 Giessen, Germany;2. New York University Shanghai, China;3. Fundação Dom Cabral, Brazil;1. Sapienza University, Department of Economics and Law, Italy;2. Bank of Italy, Directorate General for Economics, Statistics and Research, Italy;1. CNRS, OSC and LIEPP (Sciences Po Paris), CEPR, and IZA, France;2. Banque de France and Université de Nantes, France;3. Insee, Ined, Crest, France |
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| Abstract: | We explore wage flexibility in a developing country and compare our results to what has been found in similar studies using European data. In particular, we conduct a survey of 1189 firms in Pakistan to analyze the determinants of wage rigidity. We find that the existence of competitive wages and an interaction with the informal economy are statistically significant determinants of wage stickiness. While the role of competitive wages is similar to what has been found in studies of European firms, the latter find a much larger role for turnover, collective bargaining and employment protection. In contrast, in Pakistan we find that firms hiring from the informal sector are significantly more flexible in changing their wages. This suggests that the informal sector adds to the wage flexibility of the formal sector. |
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