Downward Nominal-Wage Rigidity: Micro Evidence from Tobit Models
AbstractThis paper uses Tobit models and data for union contracts to examine the extent of downward nominal-wage rigidity in Canada. To be consistent with important stylized facts, the models allow the variance of the notional wage-change distribution to be time-varying and test for menu-cost effects. The empirical results confirm the importance of using a general specification with a time-changing variance and menu-cost effects. The variance of the notional distribution fell as inflation trended downward over the sample period, and there is evidence that menu-cost effects cause some contracts to have wage freezes rather than small wage increases. Each of these features reduces the estimated effect of rigidity on wage growth. The estimated net effect of downward rigidity and menu costs in the 1990s is approximately 0.4 percentage points for the average wage change in the first year of contracts, and less than 0.1 percentage point for the average annual change over the lifetime of contracts. On balance, the evidence suggests that the long-run trade-off between inflation and the unemployment rate is close to vertical at inflation rates of 2 per cent or more if productivity growth is near the average in recent decades.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 01-7.
Length: 41 pages
Date of creation: 2001
Date of revision:
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Inflation targets; Monetary policy transmission; Credibility;
Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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