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Wage Rigidity, Institutions, and Inflation

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  • Steinar Holden
  • Fredrik Wulfsberg

Abstract

A number of recent studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries. However, DNWR for individual workers may induce downward rigidity or “a floor” for the aggregate wage growth at positive or negative levels. Aggregate wage growth may be below zero because of compositional effects, for example that old, high-wage workers are replaced by young low-wage workers. DNWR may also lead to a positive growth in aggregate wages because of changes in relative wages. We explore industry data for 19 OECD countries, over the period 1971–2006. We find evidence for floors on nominal wage growth at 6 percent and lower in the 1970s and 1980s, at one percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that DNWR is stronger in country-years with strict employment protection legislation, high union density, centralised wage setting and high inflation.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2554.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2554

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Keywords: wage inflation; downward nominal wage rigidity; OECD; wage setting;

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References

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  1. Bauer, Thomas & Bonin, Holger & Sunde, Uwe, 2004. "Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Microdata," CEPR Discussion Papers 4271, C.E.P.R. Discussion Papers.
  2. Christoph Knoppik & Thomas Beissinger, 2003. "How Rigid are Nominal Wages? Evidence and Implications for Germany," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(4), pages 619-641, December.
  3. David Card & Dean Hyslop, 1995. "Does Inflation 'Grease the Wheels of the Labor Market'?," Working Papers 735, Princeton University, Department of Economics, Industrial Relations Section..
  4. Holden, Steinar & Wulfsberg, Fredrik, 2005. "Downward Nominal Wage Rigidity in the OECD," Memorandum 10/2005, Oslo University, Department of Economics.
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  9. Holden, Steinar, 1998. " Wage Drift and the Relevance of Centralised Wage Setting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(4), pages 711-31, December.
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Cited by:
  1. Stefano Gnocchi & Evi Pappa, 2009. "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.
  2. Lünnemann, Patrick & Wintr, Ladislav, 2010. "Downward wage rigidity and automatic wage indexation: evidence from monthly micro wage data," Working Paper Series 1269, European Central Bank.

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