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Nominal wage rigidity and real wage cyclicality

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Abstract

We discuss the ability of standard estimates of the correlation of wages and employment to measure the relative strength of aggregate demand and supply shocks, given that the choice of time period, deflator, and explanatory variables inherently biases the estimated cyclical coefficients toward identifying labor supply or demand. We determine that a closer look at the standard wage/labor correlation shows that it can neither provide information on the relative strength of supply and demand shocks, nor give an indication of the response of wages to aggregate demand shocks. Following this, we test the predictions of a neo-Keynesian model for the correlation of employment and wages using restrictions generated by the model to identify movements along or shifts in labor demand. Our results are consistent with the theory of nominal wage rigidity and we find no reason to reject the neo-Keynesian model based on the correlation of wages and employment.

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  • Marcello Estevao & Beth Anne Wilson, 1998. "Nominal wage rigidity and real wage cyclicality," Finance and Economics Discussion Series 1998-21, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1998-21
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    Cited by:

    1. Eric T. Swanson, 1999. "Measuring the cyclicality of real wages: how important is aggregation across industries?," Finance and Economics Discussion Series 1999-52, Board of Governors of the Federal Reserve System (U.S.).
    2. Martins, Pedro & Snell, Andy & Thomas, Jonathan, 2010. "Minu, Startu and all that:- Pitfalls in estimating the sensitivity of a worker’s wage to aggregate unemployment," SIRE Discussion Papers 2010-109, Scottish Institute for Research in Economics (SIRE).

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