6. Conclusion
This study examined the impact of wage rigidity on sovereign credit rating (SCR). The literature on SCR (e.g., Afonso et al., 2011; Bai, 2015; Favilukis and Lin, 2013) suggested that various factors of labor market rigidity negatively correlate with SCR. We contribute to the literature by directly measuring country-level wage rigidity based on our modified regime-switching specification and addressing the intervening mechanisms of cash flow volatility between wage rigidities and SCR.
