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

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

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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.

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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2006)
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Handle: RePEc:fip:fedfpr:y:2006:x:4

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. 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. [Downloadable!] (restricted)
    Other versions:
  2. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November. [Downloadable!] (restricted)
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  4. Steinar Holden, 2004. "Wage Formation under Low Inflation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. 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. [Downloadable!] (restricted)
    Other versions:
  6. David G. Blanchflower & Andrew J. Oswald, 2005. "The Wage Curve Reloaded," NBER Working Papers 11338, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. 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. [Downloadable!]
    Other versions:
  8. 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(1996-1), pages 1-76. [Downloadable!]
  9. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June. [Downloadable!] (restricted)
  10. Bauer, Thomas & Bonin, Holger & Sunde, Uwe, 2003. "Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Micro Data," IZA Discussion Papers 959, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  11. 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. [Downloadable!] (restricted)
  12. repec:bep:macadv:v:3:y:2003:i:1:p:1117-1117 is not listed on IDEAS
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  14. Blinder, Alan S & Choi, Don H, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 1003-15, November. [Downloadable!] (restricted)
    Other versions:
  15. Sanz-de-Galdeano, Anna & Turunen, Jarkko, 2006. "The euro area wage curve," Economics Letters, Elsevier, vol. 92(1), pages 93-98, July. [Downloadable!] (restricted)
  16. Peter Gottschalk, 2004. "Downward Nominal Wage Flexibility: Real or Measurement Error?," Boston College Working Papers in Economics 611, Boston College Department of Economics. [Downloadable!]
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  17. 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)
  18. 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. [Downloadable!] (restricted)
    Other versions:
  19. 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, 09. [Downloadable!] (restricted)
    Other versions:
  20. Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying inflations grease and sand effects in the labor market," Working Paper 9705, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  21. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 761-87, November. [Downloadable!] (restricted)
  22. Reinsdorf, Marshall, 1994. "New Evidence on the Relation between Inflation and Price Dispersion," American Economic Review, American Economic Association, vol. 84(3), pages 720-31, June. [Downloadable!] (restricted)
  23. 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. [Downloadable!] (restricted)
    Other versions:
  24. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages C176-95, March. [Downloadable!] (restricted)
  25. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Blackwell Publishing, vol. 44(2), pages 287-303, June. [Downloadable!] (restricted)
  26. Blanchflower, David G & Oswald, Andrew J, 1990. " The Wage Curve," Scandinavian Journal of Economics, Blackwell Publishing, vol. 92(2), pages 215-35.
    Other versions:
    • Blanchflower, D. & Oswald, A., 1989. "The Wage Curve," Papers 340, London School of Economics - Centre for Labour Economics.
    • David G. Blanchflower & Andrew J. Oswald, 1990. "The Wage Curve," NBER Working Papers 3181, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    • David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x.
  27. 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. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Markku Kotilainen, 2006. "Finland`s Experiences and Challenges in the Euro Zone," Discussion Papers 1040, The Research Institute of the Finnish Economy. [Downloadable!]
  2. Tomi Kyyrä & Mika Maliranta, 2006. "The Micro-Level Dynamics of Declining Labour Share: Lessons from the Finnish Great Leap," Discussion Papers 406, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  3. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston. [Downloadable!]
  4. Catherine Fuss & Ladislav Wintr, 2009. "Rigid labour compensation and flexible employment? Firm-level evidence with regard to productivity for Belgium," Working Paper Series 1021, European Central Bank. [Downloadable!]
    Other versions:
  5. Tomi Kyyrä & mika Maliranta, 2006. "The Micro-level Dynamics of Declining Labour Share: Lessons from Finnish Great Leap," Discussion Papers 1049, The Research Institute of the Finnish Economy. [Downloadable!]
  6. William Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark Schweitzer & Jarkko Turunen & Melanie Ward, 2007. "How Wages Change: Micro Evidence from the International Wage Flexibility Project," CSEF Working Papers 171, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  7. Holden, Steinar & Wulfsberg, Fredrik, 2007. "Are real wages rigid downwards?," Memorandum 07/2007, Oslo University, Department of Economics. [Downloadable!]
    Other versions:
  8. Philip Du Caju & Catherine Fuss & Ladislav Wintr, 2007. "Downward wage rigidity for different workers and firms : an evaluation for Belgium using the IWFP procedure," Research series 200712-21, National Bank of Belgium. [Downloadable!]
    Other versions:
  9. Catherine Fuss, 2008. "How do firms adjust their wage bill in Belgium ? A decomposition along the intensive and extensive margins," Research series 200801-31, National Bank of Belgium. [Downloadable!]
    Other versions:
  10. Ana Buisán & Fernando Restoy, 2005. "Cross country macroeconomic heterogeneity in EMU," Banco de España Occasional Papers 0504, Banco de España. [Downloadable!]
  11. Philip Du Caju & Catherine Fuss & Ladislav Wintr, 2009. "Understanding sectoral differences in downward real wage rigidity - workforce composition, institutions, technology and competition," Working Paper Series 1006, European Central Bank. [Downloadable!]
    Other versions:
  12. repec:bep:macadv:v:8:y:2008:i:1:p:1651-1651 is not listed on IDEAS
  13. Francesco Paolo Mongelli & Juan Luis Vega, 2006. "What effects is EMU having on the euro area and its member countries? An overview," Working Paper Series 599, European Central Bank. [Downloadable!]
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