Determinants of wage stickiness in a developing economy

• Published in: Economic modelling Vol. 38; pp. 296 - 304
• Main Authors: Ahmed, Waqas, Choudhary, M. Ali, Khan, Sajawal, Naeem, Saima, Zoega, Gylfi
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.02.2014; Elsevier Science Ltd
• Subjects: Collective bargaining; Comparative studies; Developing countries; Eastern Europe; Economic theory; Hiring; Informal economy; International comparisons; Labor economics; Labor market institutions; LDCs; Modelling; Monetary policy; Pakistan; Statistical analysis; Survey of employers; Surveys; Wage rigidity; Wages & salaries; Western Europe; Europe; Pakistan; E5; O1; Labor market institutions; Monetary policy; Survey of employers; Wage rigidity; F4
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2014.01.016

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. •We use a survey of 1189 firms in Pakistan structured after surveys of European firms.•Wages are rigid in Pakistan but less so than in the European Union. Furthermore, most firms in Pakistan tend to follow time-dependent wage-setting rules.•Firms hiring from the informal sector have greater wage flexibility.•The minimum-wage plays an important role for wage-setting in Pakistan.•Relative to EU, Monetary policy in Pakistan has a smaller effect on output due to price and wage flexibilities.