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Evidence on Nominal Wage Rigidity from a Panel of U.S. Manufacturing Industries

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  • Ghosal, Vivek
  • Loungani, Prakash

Abstract

We provide a set of stylized facts on the response of industry nominal wage growth to aggregate and industry-specific influences using annual data for 450 U.S. manufacturing industries over the period 1958 to 1989. We find support for the canonical wage contracts model the response of nominal wage growth to expected inflation is estimated to be between 0.6 and 0.8. This estimate holds for several sectors within manufacturing. The response of nominal wage growth to unexpected inflation is around 0.1, indicating a striking departure from the 'classical' assumption of full indexation. We also find support for the multisector wage indexation models. The estimated profit-sharing elasticity is positive as hypothesized in these models. The instrumental variable estimates of the profit-sharing elasticity are typically between 0.1 and 0.2. Copyright 1996 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 28 (1996)
Issue (Month): 4 (November)
Pages: 650-68

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Handle: RePEc:mcb:jmoncb:v:28:y:1996:i:4:p:650-68

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. In-Moo Kim & Prakash Loungani, 1991. "The role of energy in real business cycle models," Working Paper Series, Macroeconomic Issues 91-6, Federal Reserve Bank of Chicago.
  2. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  3. Bils, Mark, 1991. "Testing for Contracting Effects on Employment," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1129-56, November.
  4. Prescott, David & Wilton, David, 1992. "The Determinants of Wage Changes in Indexed.and Nonindexed Contracts: A Switching Model," Journal of Labor Economics, University of Chicago Press, vol. 10(3), pages 331-55, July.
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  19. Dutkowsky, Donald H & Atesoglu, H Sonmez, 1993. "Wage Contracting in the Macroeconomy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 62-78, February.
  20. Duca, John V & VanHoose, David D, 1991. "Optimal Wage Indexation in a Multisector Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 859-67, November.
  21. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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  23. Gordon, Robert J, 1988. "The Role of Wages in the Inflation Process," American Economic Review, American Economic Association, vol. 78(2), pages 276-83, May.
  24. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 252-70, April.
  25. Richard B. Freeman & James L. Medoff, 1979. "New estimates of private sector unionism in the United States," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 32(2), pages 143-174, January.
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Cited by:
  1. Duca, John V. & Van Hoose, David D., 2001. "The Rise of Goods-Market Competition and the Fall of Nominal Wage Contracting: Endogenous Wage Contracting in a Multisector Economy," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 1-29, January.
  2. Daniels, Joseph P. & VanHoose, David D., 2006. "Openness, the sacrifice ratio, and inflation: Is there a puzzle?," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1336-1347, December.
  3. Duca, John V. & Vanhoose, David D., 1998. "The Rise of Goods-Market Competition and the Decline in Wage Indexation: A Macroeconomic Approach," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 579-598, July.
  4. Ghosal, Vivek, 2002. "Potential foreign competition in US manufacturing," International Journal of Industrial Organization, Elsevier, vol. 20(10), pages 1461-1489, December.
  5. Christopher Hanes, 2000. "Nominal Wage Rigidity and Industry Characteristics in the Downturns of 1893, 1929, and 1981," American Economic Review, American Economic Association, vol. 90(5), pages 1432-1446, December.
  6. John V. Duca & David D. VanHoose, 1997. "Goods-market competition and profit sharing: a multisector macro approach," Working Papers 9709, Federal Reserve Bank of Dallas.

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