Coarse Wage-Setting and Behavioral Firms

TL;DR

This paper investigates how firms' coarse wage-setting leads to wage bunching at round numbers, affecting market outcomes, supported by empirical data from Brazil and a theoretical wage-posting model.

Contribution

It introduces a wage-posting model explaining coarse wage-setting due to optimization costs and provides empirical evidence linking wage bunching to worse market outcomes.

Findings

Wages tend to cluster at round numbers in Brazil.

Firms hiring at round-numbered wages have poorer market performance.

The model predicts coarse wages arise from optimization costs.

Abstract

This paper shows that the bunching of wages at round numbers is partly driven by firm coarse wage-setting. Using data from over 200 million new hires in Brazil, I first establish that contracted salaries tend to cluster at round numbers. Then, I show that firms that tend to hire workers at round-numbered salaries have worse market outcomes. Next, I develop a wage-posting model in which optimization costs lead to the adoption of coarse rounded wages and provide evidence supporting two model predictions using two research designs. Finally, I examine some consequences of coarse wage-setting for relevant economic outcomes.