IDEAS home Printed from https://ideas.repec.org/a/fip/fedfpr/y2006x4.html
   My bibliography  Save this article

The interaction of labor markets and inflation: analysis of micro data from the International Wage Flexibility Project

Author

Listed:
  • William T. Dickens
  • Lorenz Goette
  • Erica L. Groshen
  • Steinar Holden
  • Julian Messina
  • Mark E. Schweitzer
  • Jarkko Turunen
  • Melanie Ward

Abstract

Inflation can ?grease? the wheels of economic adjustment in the labor market by relieving the constraint imposed by downward nominal wage rigidity, but not if there is also substantial downward real wage rigidity. At the same time, inflation can throw ?sand? in the wheels of economic adjustment by degrading the value of price signals. A number of recent studies suggest that wage rigidity is much more important for business cycles and monetary policy than previously believed (see Erceg, Henderson and Levin, 2000, Smets and Wouters, 2003, and Hall, 2005). Thus, our results on how wage rigidity and other labor market imperfections vary between countries and how they are affected by the rate of inflation should be of considerable value in formulating monetary policy and conducting related research.

Suggested Citation

  • William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie Ward, 2006. "The interaction of labor markets and inflation: analysis of micro data from the International Wage Flexibility Project," Proceedings, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfpr:y:2006:x:4
    as

    Download full text from publisher

    File URL: https://www.frbsf.org/wp-content/uploads/ilmi.pdf
    File Function: Full Text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90, National Bureau of Economic Research, Inc.
    2. Erica L. Groshen & Mark E. Schweitzer, 1994. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Working Papers (Old Series) 9418, Federal Reserve Bank of Cleveland.
    3. Blanchflower, David G. & Oswald, Andrew J., 2005. "The Wage Curve Reloaded," IZA Discussion Papers 1665, Institute of Labor Economics (IZA).
    4. Fehr, Ernst & Goette, Lorenz, 2005. "Robustness and real consequences of nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 779-804, May.
    5. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, April.
    6. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    7. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    8. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 921-955.
    9. Peter Gottschalk, 2005. "Downward Nominal-Wage Flexibility: Real or Measurement Error?," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 556-568, August.
    10. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 288-295.
    11. Bound, John & Krueger, Alan B, 1991. "The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 1-24, January.
    12. Erica Groshen & Mark Schweitzer, 1999. "Identifying Inflation's Grease and Sand Effects in the Labor Market," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 273-314, National Bureau of Economic Research, Inc.
    13. Lebow David E & Saks Raven E & Wilson Beth Anne, 2003. "Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-30, October.
    14. Thomas Bauer & Holger Bonin & Lorenz Goette & Uwe Sunde, 2007. "Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Micro Data," Economic Journal, Royal Economic Society, vol. 117(524), pages 508-529, November.
    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.
    16. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(2), pages 287-303.
    17. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
    18. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industrial Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1.
    19. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 761-787, November.
    20. Steinar Holden, 2005. "Wage Formation under Low Inflation," Springer Books, in: Hannu Piekkola & Kenneth Snellman (ed.), Collective Bargaining and Wage Formation, pages 39-57, Springer.
    21. Alan S. Blinder & Don H. Choi, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(4), pages 1003-1015.
    22. Stephen Nickell & Glenda Quintini, 2003. "Nominal wage rigidity and the rate of inflation," Economic Journal, Royal Economic Society, vol. 113(490), pages 762-781, October.
    23. Sanz-de-Galdeano, Anna & Turunen, Jarkko, 2006. "The euro area wage curve," Economics Letters, Elsevier, vol. 92(1), pages 93-98, July.
    24. repec:bla:scandj:v:92:y:1990:i:2:p:215-35 is not listed on IDEAS
    25. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
    26. Franco Peracchi, 2002. "The European Community Household Panel: A review," Empirical Economics, Springer, vol. 27(1), pages 63-90.
    27. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    28. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
    29. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    30. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    31. Reinsdorf, Marshall, 1994. "New Evidence on the Relation between Inflation and Price Dispersion," American Economic Review, American Economic Association, vol. 84(3), pages 720-731, June.
    32. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages 176-195, March.
    33. Martin Feldstein, 1999. "The Costs and Benefits of Price Stability," NBER Books, National Bureau of Economic Research, Inc, number feld99-1.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Philip Du Caju & Catherine Fuss & Ladislav Wintr, 2012. "Downward Wage Regidity for Different Workers and Firms," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(1), pages 5-32.
    2. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
    3. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How Wages Change: Micro Evidence from the International Wage Flexibility Project," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 195-214, Spring.
    4. Tomi Kyyrä & Mika Maliranta, 2008. "The micro-level dynamics of declining labour share: lessons from the Finnish great leap ," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 17(6), pages 1147-1172, December.
    5. Fuss, Catherine, 2008. "How do firms adjust their wage bill in Belgium? A decomposition along the intensive and extensive margins," Working Paper Series 854, European Central Bank.
    6. Mongelli, Francesco Paolo & Vega, Juan Luis, 2006. "What effects is EMU having on the euro area and its member countries? An overview," Working Paper Series 599, European Central Bank.
    7. Du Caju, Philip & Fuss, Catherine & Wintr, Ladislav, 2009. "Understanding sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition," Working Paper Series 1006, European Central Bank.
    8. Kotilainen, Markku, "undated". "Finland's Experiences and Challenges in the Euro Zone," Discussion Papers 1040, The Research Institute of the Finnish Economy.
    9. repec:bla:germec:v:11:y:2010:i::p:169-187 is not listed on IDEAS
    10. Petri Böckerman & Seppo Laaksonen & Jari Vainiomäki, 2010. "Micro and Macro Level Wage Rigidity: Lessons from Finland," Finnish Economic Papers, Finnish Economic Association, vol. 23(1), pages 27-42, Spring.
    11. International Monetary Fund, 2012. "Ireland: Selected Issues," IMF Staff Country Reports 2012/265, International Monetary Fund.
    12. Catherine Fuss & Ladislav Wintr, 2012. "Rigid Wages and Flexible Employment ?Contrasting Responses to Firm-Level and Sector-Level Productivity Developments," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(3), pages 241-268.
    13. Claudia M. Buch, 2013. "From the Stability Pact to ESM - What Next?," Chapters, in: Andreas Dombret & Otto Lucius (ed.), Stability of the Financial System, chapter 5, Edward Elgar Publishing.
    14. Steinar Holden & Fredrik Wulfsberg, 2007. "Are real wages rigid downwards?," Working Paper 2007/01, Norges Bank.
    15. Patrick Lünnemann & Ladislav Wintr, 2010. "Downward wage rigidity and automatic wage indexation: Evidence from monthly micro wage data," BCL working papers 48, Central Bank of Luxembourg.
    16. Jari Vainiomäki, 2020. "The development of wage dispersion and wage rigidity in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 29(1), pages 1-32, Spring.
    17. Fuss, Catherine & Wintr, Ladislav, 2009. "Rigid labour compensation and flexible employment? Firm-level evidence with regard to productivity for Belgium," Working Paper Series 1021, European Central Bank.
    18. Chinhui Juhn & Kristin McCue & Holly Monti & Brooks Pierce, 2018. "Firm Performance and the Volatility of Worker Earnings," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 99-131.
    19. George A. Akerlof & William T. Dickens, 2007. "Unfinished Business in the Macroeconomics of Low Inflation: A Tribute to George and Bill by Bill and George," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2), pages 31-48.
    20. Ana Buisán & Fernando Restoy, 2005. "Cross country macroeconomic heterogeneity in EMU," Occasional Papers 0504, Banco de España.
    21. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.
    22. Fuss, Catherine & Wintr, Ladislav & Du Caju, Philip, 2007. "Downward wage rigidity for different workers and firms: an evaluation for Belgium using the IWFP procedure," Working Paper Series 840, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
    2. Steinar Holden & Fredrik Wulfsberg, 2004. "Downward Nominal Wage Rigidity in Europe," Working Paper 2004/5, Norges Bank.
    3. Beissinger Thomas & Knoppik Christoph, 2001. "Downward Nominal Rigidity in West German Earnings, 1975-95," German Economic Review, De Gruyter, vol. 2(4), pages 385-417, December.
    4. Dany Brouillette & Olena Kostyshyna & Natalia Kyui, 2018. "Downward nominal wage rigidity in Canada: Evidence from micro-level data," Canadian Journal of Economics, Canadian Economics Association, vol. 51(3), pages 968-1002, August.
    5. Barno Blaes, 2008. "Ausmaß und reale Konsequenzen nach unten starrer Nominallöhne," Working Papers 048, Bavarian Graduate Program in Economics (BGPE).
    6. Pierre Fortin & George A. Akerlof & William T. Dickens & George L. Perry, 2002. "Inflation and Unemployment in the U.S. and Canada: A Common Framework," Cahiers de recherche du Département des sciences économiques, UQAM 20-16, Université du Québec à Montréal, Département des sciences économiques.
    7. Bruce Fallick & Michael Lettau & William L. Wascher, 2016. "Downward Nominal Wage Rigidity in the United States during and after the Great Recession," Working Papers (Old Series) 1602, Federal Reserve Bank of Cleveland.
    8. Steinar Holden, 2005. "Wage Formation under Low Inflation," Springer Books, in: Hannu Piekkola & Kenneth Snellman (ed.), Collective Bargaining and Wage Formation, pages 39-57, Springer.
    9. Böckerman, Petri & Laaksonen, Seppo & Vainiomäki, Jari, 2006. "Micro-level evidence on wage rigidities in Finland," MPRA Paper 1811, University Library of Munich, Germany.
    10. Holden Steinar & Wulfsberg Fredrik, 2008. "Downward Nominal Wage Rigidity in the OECD," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-50, April.
    11. Fallick, Bruce & Villar, Daniel & Wascher, William, 2022. "Downward nominal wage rigidity in the United States in times of economic distress and low inflation," Labour Economics, Elsevier, vol. 78(C).
    12. Erica L. Groshen & Mark E. Schweitzer, 1994. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Working Papers (Old Series) 9418, Federal Reserve Bank of Cleveland.
    13. Fuchi, Hitoshi & Oda, Nobuyuki & Ugai, Hiroshi, 2008. "Optimal inflation for Japan's economy," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 439-475, December.
    14. Pierpaolo Benigno & Luca Antonio Ricci, 2008. "The Inflation-Unemployment Trade-Off at Low Inflation," NBER Working Papers 13986, National Bureau of Economic Research, Inc.
    15. Francesco Devicienti, 2002. "Downward Nominal Wage Rigidity in Italy: Evidence and Consequences," LABORatorio R. Revelli Working Papers Series 20, LABORatorio R. Revelli, Centre for Employment Studies.
    16. Louis N. Christofides & Thanasis Stengos, 2003. "Wage Rigidity in Canadian Collective Bargaining Agreements," ILR Review, Cornell University, ILR School, vol. 56(3), pages 429-448, April.
    17. Thomas Beissinger & Chritoph Knoppik, 2005. "Sind Nominallöhne starr? Neuere Evidenz und wirtschaftspolitische Implikationen," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 6(2), pages 171-188, May.
    18. Anne Kathrin Funk & Daniel Kaufmann, 2022. "Do Sticky Wages Matter? New Evidence from Matched Firm Survey and Register Data," Economica, London School of Economics and Political Science, vol. 89(355), pages 689-712, July.
    19. de Ridder, M. & Pfajfar, D., 2017. "Policy Shocks and Wage Rigidities: Empirical Evidence from Regional Effects of National Shocks," Cambridge Working Papers in Economics 1717, Faculty of Economics, University of Cambridge.
    20. Francesco Devicienti & Agata Maida & Paolo Sestito, 2007. "Downward Wage Rigidity in Italy: Micro-Based Measures and Implications," Economic Journal, Royal Economic Society, vol. 117(524), pages 530-552, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedfpr:y:2006:x:4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Federal Reserve Bank of San Francisco Research Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbsfus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.