Abstract:

This paper evaluates the extent of downward nominal wage rigidity in the United States by using the retraction of a federal policy that raised some workers' wages above their market rate as a source of variation. In November 2016, a court order suspended an anticipated rule change that would have granted overtime coverage to all salaried employees in the US earning less than $913 per week. However, in preparation for the new rule, employers had already promised raises to certain employees.

Consistent with the existence of downward rigidities, I find that firms bunched workers' pay at the $913 threshold in December 2016, and this bunching persisted for over two years after the policy was terminated. Comparing stayers who got bunched to unaffected workers above the cutoff, I show that bunched workers continued to experience the same rate of wage growth before and after their raise. In addition, I find similar effects for new hires: they continued to be bunched at the $913 cutoff and their wages grew at the same rate as new hires who were not bunched. These results provide causal evidence that the present discounted value of wages for both stayers and new hires is downward rigid.