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The incidence of nominal and real wage rigidities in Great Britain: 1978–1998

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  • Richard D. Barwell
  • Mark E. Schweitzer

Abstract

This paper analyzes the extent of rigidities in wage setting in Great Britain over the 1980s and 1990s. Our estimation strategy, which generalizes the work of Altonji and Devereux (2000), models the notional wage growth distribution--the distribution of nominal wage growth that would occur in the absence of rigidities in pay--while allowing for the presence of measurement error in the data. The model then allows for the possibility that the nominal wage growth of a fraction of the workforce may be subject to a nominal or real downward rigidity. Our model suggests that real rigidities in wage setting are more prevalent than nominal rigidities, although the incidence of these real wage rigidities has fallen gradually over time. If firms cannot cut real wages in response to negative demand shocks they may resort to laying off workers. Our results support this microfoundation of the wage-unemployment Phillips curve: Workers who are more likely to be protected from wage cuts are also more likely to lose their jobs.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0508.

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Date of creation: 2005
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Handle: RePEc:fip:fedcwp:0508

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Keywords: Wages - Great Britain;

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  1. Stephen Nickell & Glenda Quintini, 2001. "Nominal wage rigidity and the rate of inflation," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 20131, London School of Economics and Political Science, LSE Library.
  2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199279173, October.
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series, Federal Reserve Bank of Chicago WP-01-08, Federal Reserve Bank of Chicago.
  4. John Bound & Charles Brown & Greg J. Duncan & Willard L Rodgers, 1989. "Measurement Error In Cross-Sectional and Longitudinal Labor Market Surveys: Results From Two Validation Studies," NBER Working Papers 2884, National Bureau of Economic Research, Inc.
  5. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 993-1008, December.
  6. Peter Howitt, 2002. "Looking Inside the Labor Market: A Review Article," Journal of Economic Literature, American Economic Association, vol. 40(1), pages 125-138, March.
  7. Ernst Fehr & Lorenz Goette, 2004. "Robustness And Real Consequences Of Nominal Wage Rigidity," Macroeconomics, EconWPA 0409025, EconWPA.
  8. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521608275.
  9. David Card & Dean Hyslop, 1997. "Does Inflation “Grease the Wheels of the Labor Market”?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122 National Bureau of Economic Research, Inc.
  10. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(462), pages C176-95, March.
  11. Simon Burgess & Hélène Turon, 2005. "Unemployment dynamics in Britain," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(503), pages 423-448, 04.
  12. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(3), pages 383-414, December.
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