The economic laws of supply and demand predict that when unemployment rises, wages will fall. But during the Great Recession—a deep and broad economic slowdown during which unemployment skyrocketed to as high as 10 percent, in October 2009—wages in the United States did not drop as economic models predicted they would. Economists attribute this to “wage stickiness” and have suggested that stickiness may also explain why wages have been slow to increase through the economic recovery.
But Chicago Booth PhD candidate John Grigsby, Booth’s Erik Hurst, and ADP Research Institute’s Ahu Yildirmaz find that wages may be less sticky than they appear.
Past efforts to study wage stickiness have been stymied by data limitations. Most data sets rely on self-reported surveys that are vulnerable to measurement error, do not include earnings fluctuations resulting from nonbase pay (such as bonuses, commissions, and fringe benefits), and are unable to distinguish between workers who change jobs and those who remain in their current positions.
To overcome these limitations, Grigsby, Hurst, and Yildirmaz used a data set from payroll processing company ADP that details earnings information for 20 million workers. The data, from between 2008 and 2016, include nonbase pay and distinguish between workers who remained with their employers and those who changed jobs.
The researchers first examined the composition of compensation packages, finding that for most workers, base pay constituted the majority of their earnings. Bonus pay went up as a proportion of compensation as earnings increased, however. For households at the median, bonuses represented only 3 percent of income, but bonus pay at the 99th percentile represented 16 percent of earnings.
Most workers who changed employers experienced a change in their base wage, with 38 percent of such workers seeing a decline.
Grigsby, Hurst, and Yildirmaz then turned their attention to wage-adjustment patterns, finding that wage cuts among workers who remained in their jobs were rare. Only 2 percent of these workers received a base-wage cut during the entire sample period studied. Approximately two-thirds of workers, meanwhile, received a base-wage increase in a typical year. Most of these increases were moderate but not small—27 percent of workers received at least one increase of 2–4 percent during the period studied. And about one-third of workers did not see any change in their base wages.
Most workers who changed employers, however, experienced a change in their base wage, with 38 percent of such workers seeing a decline. When the researchers pooled together workers who stayed and those who changed jobs, they found that base wages appeared considerably less sticky, meaning they adjusted more, although nominal wage increases were still more common than cuts.
“Twenty four percent of all workers experience a base wage change during a given quarter and 71 percent experience a base wage change during a given year,” the researchers conclude. “Including both the job-stayers and job-changers, 9 percent of workers experience a nominal base wage decline with most of the declines being driven by job-changers.”
Bonuses, for workers who received them, varied quite a bit through time—16 percent of job stayers experienced a pay cut in their total compensation, which included bonuses.
A large portion of the increase in workers’ earnings in the last 50 years is due to the decline in barriers facing women and minorities entering certain professions.
How Women and Minorities Have Driven Wage GrowthWage reductions were more common during the Great Recession. Among salaried job stayers, 7 percent had their base wages cut. Companies in industries hardest hit by the recession, such as manufacturing and construction, as well as those with “declining employment” were more likely to cut wages.
Grigsby, Hurst, and Yildirmaz’s research demonstrates that models relying solely on earnings data for job stayers, or that don’t include bonuses, commissions, and other nonbase-pay types of compensation, may miss important sources of wage flexibility in the labor market.
John Grigsby, Erik Hurst, and Ahu Yildirmaz, “Aggregate Nominal Wage Adjustments: New Evidence from Administrative Payroll Data,” Working paper, February 2019.
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