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Wage flexibility in Britain: some micro and macro evidence

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  • Mark E Schweitzer

Abstract

This paper uses the British New Earnings Survey (NES) to derive both macro and micro measures of wage rigidities. The data set spans the 1975-2000 period, with wage observations covering approximately 1% of the British workforce. Using this data set, we consider whether wages have become more flexible in recent years. Evidence drawn from macroeconomic wage equation estimates suggests that, while the relationship between wages and unemployment seems to have changed, the responsiveness of wages to unemployment rates has declined in the 1990s. In contrast to previous findings, these results suggest that wages have become less flexible. Micro tests mainly reveal that the prevalence of nominal rigidities has not declined, although there is weak evidence for a decline in the most recent years. Micro tests of wage rigidities also include an analysis of real wage rigidities. There is evidence in the NES of spikes in the wage-change distribution at the rate of inflation, beyond what would be anticipated from the rest of the distribution, suggesting the presence of real wage rigidities. This evidence is shown to be statistically significant, and points to an increase in real rigidities over the period of study.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 331.

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Date of creation: Jul 2007
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Handle: RePEc:boe:boeewp:331

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  1. David E. Lebow & David J. Stockton & William L. Wascher, 1995. "Inflation, nominal wage rigidity, and the efficiency of labor markets," Finance and Economics Discussion Series 95-45, Board of Governors of the Federal Reserve System (U.S.).
  2. Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying inflations grease and sand effects in the labor market," Working Paper 9705, Federal Reserve Bank of Cleveland.
  3. Brian Bell & Stephen Nickell & Glenda Quintini, 2000. "Wage equations, wage curves and all that," LSE Research Online Documents on Economics 20165, London School of Economics and Political Science, LSE Library.
  4. Ernst Fehr & Lorenz Götte, 2000. "Robustness and Real Consequences of Nominal Wage Rigidity," CESifo Working Paper Series 335, CESifo Group Munich.
  5. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December.
  6. Stephen Nickell & Glenda Quintini, 2001. "Nominal wage rigidity and the rate of inflation," LSE Research Online Documents on Economics 20131, London School of Economics and Political Science, LSE Library.
  7. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc.
  8. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
  9. Ernst Fehr & Lorenz Goette, 2007. "The Robustness and Real Consequences of Nominal Wage Rigidity," Kiel Working Papers 1343, Kiel Institute for the World Economy.
  10. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September.
  11. Kenneth J. McLaughlin, 1999. "Are nominal wage changes skewed away from wage cuts?," Review, Federal Reserve Bank of St. Louis, issue May, pages 117-132.
  12. Jennifer V Greenslade & Richard G Pierse & Jumana Saleheen, 2003. "A Kalman filter approach to estimating the UK NAIRU," Bank of England working papers 179, Bank of England.
  13. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages C176-95, March.
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  1. The macroeconomic challenge
    by chris dillow in Stumbling and Mumbling on 2014-02-19 14:07:50

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