Wage Rigidity and the Effects of Monetary Policy: Evidence from the Stock Market

Authors: Ester Faia (Goethe University) and Vincenzo Pezone (Goethe University)

Title: Wage Rigidity and the Effects of Monetary Policy: Evidence from the Stock Market

Abstract: Using a unique confidential contract level dataset merged with firm-level asset prices data, we find robust evidence that firms' stock market valuations and employment levels respond more to monetary policy announcements the higher the degree of wage rigidity. Data on renegotiations of collective bargaining agreements allow us to construct an exogenous measure of wage rigidity. We also find that firms with high labor intensity and low profitability respond by more to the monetary policy shock. We rationalize the evidence through a model in which firms in different sectors feature different degrees of wage rigidity due to staggered renegotiations vis-a-vis unions.