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Why Are Nominal Wages Downwardly Rigid, but Less So in Japan? An Explanation Based on Behavioral Economics and Labor Market/Macroeconomic Differences

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Author Info

  • Sachiko Kuroda

    (Associate Professor, Hitotsubashi University (E-mail: kuroda@ier.hit-u.ac.jp))

  • Isamu Yamamoto

    (Associate Professor, Keio University (E-mail: yamamoto@fbc.keio.ac.jp))

Abstract

In this paper, we survey the theoretical and empirical literature to investigate why nominal wages can be downwardly rigid. Looking back from the 19th century until recently, we first examine the existence and extent of downward nominal wage rigidity (DNWR) for several countries. We find that (1) nominal wages were flexible in the 19th century and the first half of the 20th century, but (2) nominal wages were downwardly rigid in almost all the industrialized countries in the second half of the 20th century, although (3) the extent of DNWR varied from country to country. Next, we use a behavioral economics framework to explain the reasons for DNWR. We also explain why the existence and extent of DNWR varied between time periods and/or from country to country, focusing on differences in the labor market characteristics (such as labor mobility and employment protection legislation) and in the macroeconomic environment (such as economic growth and inflation), which can alter employeesf and firmsf perceptions toward nominal wage cuts.

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File URL: http://www.imes.boj.or.jp/research/papers/english/me25-2-2.pdf
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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 25 (2007)
Issue (Month): 2 (November)
Pages: 45-88

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Handle: RePEc:ime:imemes:v:25:y:2007:i:2:p:45-88

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Related research

Keywords: Downward nominal wage rigidity; Behavioral economics; Labor mobility; Employment protection legislation; Inflation rate; Indexation;

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Cited by:
  1. Muto, Ichiro & Shintani, Kohei, 2014. "An Empirical Study on the New Keynesian Wage Phillips Curve: Japan and the US," MPRA Paper 53934, University Library of Munich, Germany.

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