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Robustness And Real Consequences Of Nominal Wage Rigidity

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Author Info
Ernst Fehr (University of Zurich & CEPR)
Lorenz Goette (University of Zurich)

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Abstract

Recent studies found evidence for nominal wage rigidity during periods of relatively high wage inflation. It has been argued, however, that in an environment with low wage inflation, when nominal wage cuts become customary, workers’ opposition to nominal cuts would erode and, hence, firms would no longer hesitate to reduce nominal pay. If this argument is valid nominal wage rigidities are largely irrelevant because in a high inflation environment there is little need to cut nominal pay while in a low inflation environment the necessary cuts would occur. To examine this argument we use data from Switzerland where wage inflation has been very low for many years in the 1990s. We find that the rigidity of nominal wages is a robust phenomenon that does not vanish in a low inflation environment. In addition, it constitutes a considerable obstacle to real wage adjustments. In the absence of downward nominal rigidity, real wages would indeed be quite responsive to unemployment. Moreover, the wage sweepups caused by nominal rigidity are strongly correlated with unemployment suggesting that downward rigidity of nominal wages indeed contributes to unemployment.

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Paper provided by EconWPA in its series Macroeconomics with number 0409025.

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Length: 35 pages
Date of creation: 29 Sep 2004
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Handle: RePEc:wpa:wuwpma:0409025

Note: Type of Document - pdf; pages: 35
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Keywords: nominal wage rigidity;

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Find related papers by JEL classification:
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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    Other versions:
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    Other versions:
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  7. Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December. [Downloadable!] (restricted)
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  15. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Beth Anne Wilson, 1999. "Wage rigidity: a look inside the firm," Finance and Economics Discussion Series 1999-22, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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