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Nominal contracting theories of unemployment: evidence from panel data

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  • Michael P. Keane

Abstract

This paper examines the response of real wages and employment probabilities to nominal shocks using micro-panel data from the National Longitudinal Survey of Young Men. Both economy-wide and sector-specific responses to nominal shocks are examined. The observed response patterns are inconsistent with nominal contract based theories of unemployment. These theories predict that nominal surprises should be negatively correlated with real wages in sectors with nominal contracting. In fact, inflation surprises are found to be essentially uncorrelated with real wages in all sectors, while money growth surprises are positively correlated with real wages in manufacturing and uncorrelated with real wages elsewhere. The positive real wage-money growth correlation in manufacturing is robust to controls for real shocks and business cycle conditions, so it does not appear to be explicable by real business cycle models with endogenous money. The type of model described by McCallum (1980, 1986), in which commodity prices are more rigid than wages, is consistent with the result.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Discussion Paper / Institute for Empirical Macroeconomics with number 27.

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Date of creation: 1990
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Handle: RePEc:fip:fedmem:27

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Keywords: Unemployment ; Wages;

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Cited by:
  1. Jovanic, Boyan & Ueda, Masako, 1997. "Contracts and Money," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 700-708, August.
  2. Gottschalk, Peter T., 2004. "Downward Nominal Wage Flexibility: Real or Measurement Error?," IZA Discussion Papers 1327, Institute for the Study of Labor (IZA).
  3. Keane, Michael, 2010. "The Tax-Transfer System and Labour Supply," MPRA Paper 55167, University Library of Munich, Germany.
  4. Guangjie Ning, 2008. "Wage forming mechanism in the market transitional process of China (1993–2005): Evidence from the provincial panel data," Psychometrika, Springer, vol. 3(2), pages 312-326, June.

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