Robustness and Real Consequences of Nominal Wage Rigidity

By Ernst Fehr, Lorenz F. Goette. Social Science Research Network, 2003

309 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/434d94d8cd91d5b6cbe00052206bfe482766222c

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Citations in the corpus

Aggregate Nominal Wage Adjustments: New Evidence from Administrative Payroll Data (2019, background): “For instance, Gertler et al. (2016) put forth a model in which the rigidity of incumbents’ wages is the key factor in determining cyclical fluctuations, while Pissarides (2009) makes a compelling case for the importance of new hire wages.”
Reasons for Wage Rigidity in Germany (2006, unknown): “2 Evidence on the existence of wage rigidity based on pay histories of individual workers is provided, among others, by Altonji and Devereux (2000) and Card and Hyslop (1997) for the United States, Beissinger and Knoppik (2003), Pfeiffer (2003) for Germany, and Fehr and Götte (2005) for Switzerland.”
A Behavioral Account of the Labor Market: The Role of Fairness Concerns (2008, methodology): “Virtually any study that examines the distribution of wage changes finds this pattern (see e.g. (Altonji & Devereux 2000; Fehr & Goette 2005; Wilson 1999)).”
Background studies for the ECB's evaluation of its monetary policy strategy (2003, methodology): “In Switzerland, the Swiss National Bank has provided an explicit quantitative definition of price stability, which is fully equivalent to that of the ECB.”