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Wage formation under low inflation

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  • Holden, Steinar

    ()
    (Dept. of Economics, University of Oslo)

Abstract

This paper reviews the literature on the effects of low steady-state inflation on wage formation, focusing on four different effects. First, under low inflation, downward nominal wage rigidity (DNWR) may prevent real wage cuts that would have happened had inflation been higher. Second, wages (and prices) are given in nominal contracts, and inflation affects both how often wages are adjusted, and to what extent wages are set in a forward-looking manner. Third, incomplete labour contracts may provide workers with scope for inflicting costs on the firm without violating the contract, thus forcing the firm to accept a rise in nominal wages. Fourth, if effort depends on wages relative to a reference level, and workers and firms underweight inflation when updating the reference level, positive but moderate inflation may reduce wage pressure. The paper ends by a brief survey of empirical evidence, and a discussion of whether labour markets may adapt to a low inflation environment.

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Bibliographic Info

Paper provided by Oslo University, Department of Economics in its series Memorandum with number 09/2004.

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Length: 22 pages
Date of creation: 26 Oct 2004
Date of revision:
Handle: RePEc:hhs:osloec:2004_009

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Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
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Web page: http://www.oekonomi.uio.no/indexe.html
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Keywords: Wage formation; low inflation;

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References

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Citations

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Cited by:
  1. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How wages change: micro evidence from the international wage flexibility project," Staff Reports 275, Federal Reserve Bank of New York.
  2. Orietta DESSY, 2005. "Nominal wage rigidity in Europe: estimates and institutional causes," Departmental Working Papers 2005-09, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  3. Steinar Holden & Fredrik Wulfsberg, 2007. "Are Real Wages Rigid Downwards?," CESifo Working Paper Series 1983, CESifo Group Munich.
  4. Du Caju, Philip & Fuss, Catherine & Wintr, Ladislav, 2007. "Downward wage rigidity for different workers and firms: an evaluation for Belgium using the IWFP procedure," Working Paper Series 0840, European Central Bank.
  5. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.
  6. Böckerman, Petri & Laaksonen, Seppo & Vainiomäki, Jari, 2006. "Micro-level evidence on wage rigidities in Finland," MPRA Paper 1811, University Library of Munich, Germany.
  7. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie Ward, 2006. "The interaction of labor markets and inflation: analysis of micro data from the International Wage Flexibility Project," Proceedings, Federal Reserve Bank of San Francisco.

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