Time-dependent or state-dependent wage-setting? Evidence from periods of macroeconomic instability

• Unique administrative data from Iceland provide new insight into nominal wage rigidity.
• The mean monthly frequency of nominal wage change is 13 percent.
• Frequency of nominal wage cuts responds to macroeconomic shocks.
• Wage change is time-dependent and there is evidence of contracts with fixed duration.
• Timing of adjustment also depends on the state during current and past wage spells.

Administrative data on monthly wages in Iceland during 1998–2010 provide new insight into nominal wage rigidity. Unlike the data used in previous work, ours have a higher frequency, minimal measurement error, and a long sample including a period of substantial macroeconomic instability. We find that the monthly frequency of nominal wage changes is 13 percent. Although nominal wage cuts are rare, their frequency rises following a large macroeconomic shock. Timing of wage changes is both time-dependent and state-dependent: we find evidence of synchronization of adjustment and contracts of fixed duration, but also that inflation and unemployment over the wage spell affect the timing of adjustment.