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Downward Nominal Wage Rigidity, Inflation and Unemployment: New Evidence Using Micro-Level Data

Author

Listed:
  • Dany Brouillette
  • Natalia Kyui

Abstract

Recent evidence suggests that the extent of downward nominal wage rigidity (DNWR) in the Canadian labour market has risen following the 2008–09 recession (see Brouillette, Kostyshyna and Kyui 2016). This note studies whether DNWR can lead to a long-run trade-off between inflation and unemployment, especially at lower rates of inflation—a question that has important implications for the optimal level of inflation in the long run. The results suggest that the trade-off between unemployment and inflation remains weak despite the estimated increase in DNWR. In particular, the long-run Phillips curve is close to vertical at inflation rates of 2 per cent or more, in line with earlier findings (Crawford and Wright 2001). As a result, an increase in long-term inflation from 2 to 3 per cent would lower unemployment by about 0.1–0.2 percentage points. Overall, our results suggest that the benefits of raising the inflation target to attain a lower long-term unemployment level seem rather weak.

Suggested Citation

  • Dany Brouillette & Natalia Kyui, 2017. "Downward Nominal Wage Rigidity, Inflation and Unemployment: New Evidence Using Micro-Level Data," Staff Analytical Notes 17-6, Bank of Canada.
    • Handle: RePEc:bca:bocsan:17-6
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    References listed on IDEAS

    as
    1. Dany Brouillette & Olena Kostyshyna & Natalia Kyui, 2018. "Downward nominal wage rigidity in Canada: Evidence from micro‐level data," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(3), pages 968-1002, August.
    2. Jean Farès & Seamus Hogan, 2000. "The Employment Costs of Downward Nominal-Wage Rigidity," Staff Working Papers 00-1, Bank of Canada.
    3. Nelson, Forrest D., 1977. "Censored regression models with unobserved, stochastic censoring thresholds," Journal of Econometrics, Elsevier, vol. 6(3), pages 309-327, November.
    4. Pierre Fortin, 2013. "The Macroeconomics of Downward Nominal Wage Rigidity : a Review of the Issues and New Evidence for Canada," Cahiers de recherche 1309, CIRPEE.
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    Cited by:

    1. Dany Brouillette & James Ketcheson & Olena Kostyshyna & Jonathan Lachaine, 2017. "Wage Growth in Canada and the United States: Factors Behind Recent Weakness," Staff Analytical Notes 17-8, Bank of Canada.

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    More about this item

    Keywords

    Econometric and statistical methods; Inflation and prices; Labour markets;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J - Labor and Demographic Economics
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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