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Employment Effects Of Nominal-Wage Rigidity: An Examination Using Wage-Settlements Data

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  • Faruqui, Umar Ahmed
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    Abstract

    The argument advocating a moderate level of inflation based on the downward nominal-wage rigidity (DNWR) hypothesis rests on three factors: its presence, extent, and negative impact in the labour market. This paper focuses on the employment effect of DNWR. It reviews the evidence presented by Simpson, Cameron, and Hum (1998), in light of a potential bias problem associated with their reduced-form model. We describe modifications to their employment model that aim to better isolate the effects of DNWR on employment growth. Analysis shows that empirical evidence in Simpson, Cameron, and Hum (1998) is sensitive to model specification. In contrast to Simpson, Cameron, and Hum (1998), who found—economically and statistically—significant employment costs for DNWR, in most of our specifications DNWR has no significant effect on employment growth.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/01/wp00-14.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 00-14.

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    Length: 30 pages
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:bca:bocawp:00-14

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    Keywords: Labour markets;

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    Cited by:
    1. Castellanos, Sara G. & Garcia-Verdu, Rodrigo & Kaplan, David S., 2004. "Nominal wage rigidities in Mexico: evidence from social security records," Journal of Development Economics, Elsevier, vol. 75(2), pages 507-533, December.
    2. Pierre Fortin & George A. Akerlof & William T. Dickens & George L. Perry, 2002. "Inflation and Unemployment in the U.S. and Canada: A Common Framework," Cahiers de recherche du Département des sciences économiques, UQAM 20-16, Université du Québec à Montréal, Département des sciences économiques.

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