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Revisiting Real Wage Rigidity

Author

Listed:
  • Michael Ellington

    (Management School, University of Liverpool, Liverpool L69 7ZH UK)

  • Chris Martin

    (Department of Economics, University of Bath, Bath BA2 7AY UK)

  • Bingsong Wang

    (Department of Economics, University of Sheffield, 9 Mappin Str, Sheffield S1 4DT, UK)

Abstract

In this paper, we provide empirical evidence that real wage rigidity is not a major cause of unemployment volatility. We argue that there is a disconnect between the theoretical and empirical literatures on this topic. While theoretical studies define real wage rigidity as the response of wages to changes in unemployment following productivity shocks, the empirical literature measures real wage rigidity as the estimated semi-elasticity of wages with respect to unemployment, averaged over all shocks. We show that averaging over shocks gives a biased measure of real wage rigidity, as the impact of other shocks confounds the response to productivity shocks. Our results indicate that the estimated semi-elasticity with respect to productivity shocks is twice as large as the estimated semi-elasticity averaged over all shocks. This implies that one cannot attribute unemployment volatility to real wage rigidity.

Suggested Citation

  • Michael Ellington & Chris Martin & Bingsong Wang, 2022. "Revisiting Real Wage Rigidity," Working Papers 2022015, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2022015
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    References listed on IDEAS

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    More about this item

    Keywords

    real wage rigidity; time-varying parameter model; real wages; search frictions;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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