4. DOWNWARD NOMINAL WAGE RIGIDITY IN ESTONIA –
5.3. Downward nominal wage rigidity and age
A person’s age could have an impact on his or her bargaining behaviour, and thus influence the DNWR. For example, younger people tend to have higher unemployment rates so that in 2009 the unemployment rate in Estonia among 15–24 year olds was 27.5% while it was 13% for the 25–49 age group 25–49)38. Difficulties in finding a job can make people behave less demandingly in wage negotiations.
A quick look at the histograms of the pooled wage change data for 2002–
2008 highlights two interesting points. Firstly, judging by the number of zero wage growth observations in the wage distribution, then the group of those older than 65 years show significantly higher rigidity than workers younger than 65. Secondly, the share of higher than 100% wage growth is significantly higher for younger workers (under 24 years old) than for older age groups. The share of wage freezes is also the lowest for them. These findings will be addressed later in this chapter. In the following section the same models as in the previous sub-chapter will be estimated (5–1), (5–2) and (5–3). In order to keep the results as comparable as possible with other employee and employer groups, a 2% bin width will be used. The 45th percentile serves as the location and in
38 Source: Statistics Estonia.
0%
2%
4%
6%
8%
10%
12%
14%
16%
2002 2003 2004 2005 2006 2007 2008
Men Women
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standardising the data difference between the 95th and 45th percentiles is the measure of variance.
The first glance at the Table 26 shows that there are clear differences between age groups39 and the relationship seems to be hump-shaped. People in their prime working age of 35–55 tend to have more rigid wages than younger people (<24) and also people who do not have long before retirement (55–64). These figures seem to be quite closely in line with over-the-life-cycle wage figures,
39 These differences (with an exception of differences between groups 25–34 and 55–
64) are also statistically significant at 5% significance level (see Appendix 3).
Figure 24. Wage change distributions, by age group 2002–2008 Source: Estonian Tax and Customs Board, author’s calculations
which could also be treated as an indication of a person’s bargaining power in wage negotiations (see Figure 25). Pseudo-cohort wage profiles also explain the high share of over 100% wage growth figures, as from 15–30 the wages seem to rise very steeply40
Table 26. Rigidity coefficients from the WLS estimates of equation system (5–
2), by age group
Age group Coefficient Std. Error t-Statistic Prob.
<24 5.9% 0.0048 12.2781 0.0000
25–34 8.0% 0.0036 22.1815 0.0000
35–44 11.4% 0.0040 28.3019 0.0000
45–54 9.8% 0.0047 20.9804 0.0000
55–64 8.3% 0.0043 19.2700 0.0000
>65 15.2% 0.0053 28.6623 0.0000
Source: Estonian Tax and Customs Board, author’s calculations
Figure 25. Pseudo-cohort over-the-life-cycle wage profile calculated as average mean wage for age group, year 2009 (EEK)
Source: Estonian Tax and Customs Board, author’s calculations
40 One reason for this could be that the share of part-time workers amongst 15–24 year olds is more than twice as high as amongst 25–49 year olds (Source: Statistics Estonia).
High earnings growth figures can thus be partly a result of switches from part time to full time work.
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However, older cohorts seem to be the ones with the most rigid wage, with more than 15% of wage cuts being prevented by DNWR. What could be the reason for this? As retired people do have an alternative income from their pension, they might be more rigid in wage negotiations. The most probable reason, however, is employment protection legislation. The costs associated with laying off a person with more than 10 years of experience during the period 2002–2008 consisted of a four-month notice period and severance payment of four average monthly wages. This is twice as high as for people with less than five years of experience, so threats of a wage cut or the sack if the worker does not agree are less convincing for workers with higher seniority than for people with shorter seniority. Among older workers, the share of more experienced workers is larger than in younger age groups.
Another point is the issue of selectivity. It could be that the personal characteristics of the workers who decide to continue working after retirement age are different, for example they have more qualifications or better wage bargaining behaviour. If this is the case, it is more difficult for the employer to get them to agree to a wage cut.
Table 27. Time-varying rigidity coefficients from the WLS estimates of equation system (5–2), by age group
Age group Coefficient Std. Error t-Statistic Prob.
<24 ρ 5.6% 0.0067 8.3214 0.0000 Source: Estonian Tax and Customs Board, author’s calculations
Introducing time variability to the rigidity coefficients gives quite interesting results. Not all age groups are equally sensitive to changes in labour market conditions – at the 5% significance level the rigidity of wages of those under 34 or aged 45–54 does not depend on changes in the unemployment rate. However, for other age groups too, the fluctuations brought about by changes in the unemployment rate are not large. The only exception is the group of those over 65, which shows significantly higher volatility.
Figure 26. Rigidity coefficients, by age group (model (5–2)) Source: Estonian Tax and Customs Board, author’s calculations
Table 28. Time-varying rigidity coefficients from the WLS estimates of equation system (5–3), by age group
Age group Coefficient Std. Error t-Statistic Prob.
<25 ρ 3.9% 0.0127 3.1155 0.0019
ρΔU –0.2% 0.0031 –0.6467 0.5181 ρU 0.2% 0.0015 1.5459 0.1227
25–34 ρ 7.5% 0.0114 6.5673 0.0000
ρΔU –0.3% 0.0036 –0.8895 0.3741 ρU 0.0% 0.0014 0.2406 0.8100 35–44 ρ 13.2% 0.0118 11.2065 0.0000
ρΔU –0.6% 0.0031 –1.8304 0.0677 ρU –0.3% 0.0015 –2.0961 0.0365 45–54 ρ 15.2% 0.0145 10.5377 0.0000
ρΔU –0.7% 0.0036 –2.0485 0.0410 ρU –0.7% 0.0017 –4.2592 0.0000
55–64 ρ 11.9% 0.0143 8.3786 0.0000
ρΔU –1.6% 0.0035 –4.5527 0.0000 ρU –0.6% 0.0018 –3.2859 0.0011
>64 ρ 29.4% 0.0158 18.6097 0.0000 ρΔU –3.0% 0.0041 –7.3944 0.0000
ρU –2.0% 0.0019 –10.6819 0.0000 Source: Estonian Tax and Customs Board, author’s calculations
0%
5%
10%
15%
20%
25%
2002 2003 2004 2005 2006 2007 2008
<25 25-34 35-44 45-54 55-64 >65
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Figure 27. Rigidity coefficients for different age groups 2002–2008 (model (5–3)) Source: Estonian Tax and Customs Board, author’s calculations
Model specification (5–3) does not change the picture significantly. The wages of the older people (65 and older) become even more volatile and are clearly increasing over the years of declining unemployment. However, when the labour market showed the first signs of crisis in 2008 the rigidity coefficient declined significantly, undermining the hypothesis that high rigidity coefficients for older people are the result of employers’ preference for laying off older people instead of cutting their wages.
Another reason for higher wage rigidity in the age group of 65 and older could be that their wages are anyway lower than those of the age groups that form the majority of the labour market. It might thus be difficult to cut older workers’ wages and still keep them motivated to work, especially when they are already entitled to a pension. However, if the overall labour market situation gets worse, nobody has immunity against wage cuts and so wage rigidity will decline, even while it remains higher than for other age groups.