Wage Rigidity and Unemployment in OECD Countries (1983)

Real wage rigidity is often blamed for causing unemployment in the wake of adverse real shocks, like changes in productivity or the terms of trade. Likewise nominal wage rigidity is blamed for causing unemployment in the wake of adverse nominal shocks, like falls in nominal demand.1 However, there has been relatively little systematic discussion of how these concepts should be defined. Some authors (e.g. Sachs, 1979) have defined real wage rigidity as the opposite of nominal wage rigidity, with the US nominally rigid and Europe really rigid.2 The rigidity of European real wages has then been used to explain why Europe has experienced a greater increase in unemployment since 1973 than the US. But in this discussion real wage rigidity has not been measured in a way which would in fact predict how much unemployment would result from a given real shock. The discussion has focused on the degree of nominal inertia in the system. But the unemployment cost of real shocks does not depend primarily on the degree of nominal inertia but rather on the effect of unemployment in the Phillips curve.