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Downward nominal wage rigidity: evidence from the employment cost index

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Author Info
David E. Lebow
Raven E. Saks
Beth Anne Wilson
Abstract

We examine the extent of downward nominal wage rigidity using the microdata underlying the BLS employment cost index--an extensive, establishment-based dataset with detailed information on wage and benefit costs. We find stronger evidence of downward nominal wage rigidity than did previous studies using panel data on individuals. Firms appear able to circumvent part, but not all, of this rigidity by varying benefits: Total compensation displays modestly less rigidity than do wages alone. Given our estimated amount of rigidity, a simple model predicts that the disinflation over the 1980s would have raised equilibrium unemployment notably. This prediction stands in contrast to the actual behavior of unemployment over this period: The addition of a term capturing the cost of rigidity (that rises as inflation falls) has no additional explanatory power in a standard Phillips Curve equation.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-31.

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Date of creation: 1999
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Handle: RePEc:fip:fedgfe:1999-31

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Keywords: Wages ; Employment (Economic theory) ; Cafeteria benefit plans;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  3. Seamus Hogan, 1998. "What Does Downward Nominal-Wage Rigidity Imply for Monetary Policy?," Canadian Public Policy, University of Toronto Press, vol. 24(4), pages 513-525, December. [Downloadable!] (restricted)
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  4. David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Ben Craig, 1995. "Are wages inflexible?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Apr 1. [Downloadable!]
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  7. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December. [Downloadable!] (restricted)
  8. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-2), pages 297-346. [Downloadable!]
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  12. 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. [Downloadable!] (restricted)
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  14. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December. [Downloadable!] (restricted)
  15. 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.).
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  18. Charles Freedman & Tiff Macklem, 1998. "A Comment on "The Great Canadian Slump"," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 646-665, August. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yongsung Chang & Mark Bils, 2002. "Welfare Costs of Sticky Wages When Effort Can Respond," Macroeconomics 0204003, EconWPA. [Downloadable!]
    Other versions:
  2. Ernst Fehr & Lorenz Goette, 2000. "Robustness and Real Consequences of Nominal Wage Rigidity," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Yi-Ping Tseng, 2001. "Individuals’ Wage Changes in Australia 1997-2000," Melbourne Institute Working Paper Series wp2001n04, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  4. Jonas Agell & Helge Bennmarker, 2002. "Wage Policy and Endogenous Wage Rigidity: A Representative View From the Inside," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Knoppik, Christoph & Beissinger, Thomas, 2001. "How Rigid are Nominal Wages? Evidence and Implications for Germany," IZA Discussion Papers 357, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  6. Beth Anne Wilson, 1999. "Wage rigidity: a look inside the firm," Finance and Economics Discussion Series 1999-22, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Agell, Jonas & Bennmarker, Helge, 2002. "Wage Policy and Endogenous Wage Rigidity: A Representative View from the Inside," Research Papers in Economics 2002:12, Stockholm University, Department of Economics. [Downloadable!]
  8. Ernst Fehr & Lorenz Goette, 2007. "The Robustness and Real Consequences of Nominal Wage Rigidity," Kiel Working Papers 1343, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  9. Takatoshi Ito, 2004. "Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?," NBER Working Papers 10818, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Gaetano Antinolfi & David S. Kaplan, 2007. "Inflation and Establishment Turnover," Eastern Economic Journal, Eastern Economic Association, vol. 33(3), pages 317-341, Summer. [Downloadable!]
  11. Agell, Jonas & Bennmarker, Helge, 2002. "Wage policy and endogenous wage rigidity: a representative view from the inside," Working Paper Series 2002:12, IFAU - Institute for Labour Market Policy Evaluation. [Downloadable!]
  12. George A. Akerlof, 2007. "The Missing Motivation in Macroeconomics," American Economic Review, American Economic Association, vol. 97(1), pages 5-36, March. [Downloadable!]
  13. Truman F. Bewley, 2002. "Fairness, Reciprocity, and Wage Rigidity," Cowles Foundation Discussion Papers 1383, Cowles Foundation, Yale University. [Downloadable!]
  14. Jacqueline Dwyer & Kenneth Leong, 2000. "Nominal Wage Rigidity in Australia," RBA Research Discussion Papers rdp2000-08, Reserve Bank of Australia. [Downloadable!]
  15. Christofides, Louis N. & Stengos, Thanasis, 2001. "Nominal Wage Rigidity: Non-Parametric Tests Based on Union Data for Canada," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  16. Janet L. Yellen, 2004. "Stabilization policy: a reconsideration," Speech, Federal Reserve Bank of San Francisco, issue Jul 1. [Downloadable!]
  17. Lundborg, Per, 2008. "Wage Redistribution and the Long Run Phillips Curve," Working Paper Series 3/2008, Swedish Institute for Social Research. [Downloadable!]
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