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Wage formation under low inflation

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Author Info
Steinar Holden () (University of Oslo and Norges Bank)

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Abstract

This paper reviews the literature on the effects of low steady-state inflation on wage formation, focusing on four different effects. First, under low inflation, downward nominal wage rigidity (DNWR) may prevent real wage cuts that would have happened had inflation been higher. Second, wages (and prices) are given in nominal contracts, and inflation affects both how often wages are adjusted, and to what extent wages are set in a forward-looking manner. Third, incomplete labour contracts may provide workers with scope for inflicting costs on the firm without violating the contract, thus forcing the firm to accept a rise in nominal wages. Fourth, if effort depends on wages relative to a reference level, and workers and firms underweight inflation when updating the reference level, positive but moderate inflation may reduce wage pressure. The paper ends by a brief survey of empirical evidence, and a discussion of whether labour markets may adapt to a low inflation environment.

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Paper provided by Norges Bank in its series Working Paper with number 2004/14.

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Length: 22 pages
Date of creation: 10 Nov 2004
Date of revision:
Handle: RePEc:bno:worpap:2004_14

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Related research
Keywords: wage formation; nominal contracts; downward nominal wage rigidity; inflation;

Other versions of this item:

Find related papers by JEL classification:
J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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References listed on IDEAS
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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. 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!]
  2. Böckerman, Petri & Laaksonen, Seppo & Vainiomäki, Jari, 2006. "Micro-level evidence on wage rigidities in Finland," MPRA Paper 1811, University Library of Munich, Germany. [Downloadable!]
  3. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How wages change: micro evidence from the international wage flexibility project," Staff Reports 275, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  4. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie Ward, 2006. "The interaction of labor markets and inflation: analysis of micro data from the International Wage Flexibility Project," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
  5. Orietta DESSY, 2005. "Nominal wage rigidity in Europe: estimates and institutional causes," Departemental Working Papers 2005-09, Department of Economics University of Milan Italy. [Downloadable!]
  6. 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!]
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  7. Steinar Holden & Fredrik Wulfsberg, 2007. "Are Real Wages Rigid Downwards?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
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