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Missing Wage Inflation? Downward Wage Rigidity and the Natural Rate of Unemployment

Author

Listed:
  • Yuto Iwasaki

    (Bank of Japan)

  • Ichiro Muto

    (Bank of Japan)

  • Mototsugu Shintani

    (University of Tokyo)

Abstract

In recent years, advanced economies, including Japan, have experienced a weak response of wage inflation to the decline in the unemployment rate (i.e. missing wage inflation). In this study, we investigate whether downward wage rigidity (DWR) in recession periods can be a source of this weak wage response. Specifically, we jointly estimate the degree of DWR as well as the natural rate of unemployment using a nonlinear DSGE model with asymmetric adjustment costs. We show that wage adjustment costs are highly asymmetric in Japan, the euro area, and the UK; especially, a clear L-shaped wage Phillips curve between wage inflation and the unemployment gap (i.e. the actual unemployment rate minus the natural rate) is obtained in Japan. We argue that missing wage inflation is attributable to DWR and wage inflation is likely to reappear under the tight labor market conditions.

Suggested Citation

  • Yuto Iwasaki & Ichiro Muto & Mototsugu Shintani, 2018. "Missing Wage Inflation? Downward Wage Rigidity and the Natural Rate of Unemployment," Bank of Japan Research Laboratory Series 18-E-3, Bank of Japan.
    • Handle: RePEc:boj:bojlab:lab18e03
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    References listed on IDEAS

    as
    1. Aruoba, S. Borağan & Bocola, Luigi & Schorfheide, Frank, 2017. "Assessing DSGE model nonlinearities," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 34-54.
    2. Kim, Jinill & Ruge-Murcia, Francisco J., 2011. "Monetary policy when wages are downwardly rigid: Friedman meets Tobin," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2064-2077.
    3. Iwasaki, Yuto & Muto, Ichiro & Shintani, Mototsugu, 2021. "Missing wage inflation? Estimating the natural rate of unemployment in a nonlinear DSGE model," European Economic Review, Elsevier, vol. 132(C).
    4. Kim, Jinill & Ruge-Murcia, Francisco J., 2009. "How much inflation is necessary to grease the wheels?," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 365-377, April.
    5. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Consolo, Agostino & Da Silva, António Dias, 2019. "The euro area labour market through the lens of the Beveridge curve," Economic Bulletin Articles, European Central Bank, vol. 4.
    2. Wataru Hirata & Toshitaka Maruyama & Tomohide Mineyama, 2020. "Flattening of the Wage Phillips Curve and Downward Nominal Wage Rigidity: The Japanese Experience in the 2010s," Bank of Japan Working Paper Series 20-E-4, Bank of Japan.
    3. Fructuoso Borrallo Egea & Pedro del Río López, 2021. "Monetary policy strategy and inflation in Japan," Occasional Papers 2116, Banco de España.

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    More about this item

    Keywords

    wage; natural rate of unemployment; downward wage rigidity; Phillips curve; nonliner DSGE model;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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