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How Rigid are Nominal Wages? Evidence and Implications for Germany

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  • Knoppik, Christoph

    ()
    (University of Regensburg)

  • Beissinger, Thomas

    ()
    (University of Hohenheim)

Abstract

Many of the recent attempts to find evidence of downward nominal wage rigidity in micro data have suffered from a number of problems, including composition bias and the effects of measurement error. In order to avoid these problems we explicitly model the determinants of wage changes and the measurement process that leads to observable earnings changes, thereby directly tackling the question of whether and to which extent downward nominal wage rigidity exists in German micro data. We find a high degree of downward nominal wage rigidity, which for rates of inflation lower than three percent is shown to lead to higher equilibrium unemployment via the generated real wage wedge.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 357.

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Length: 34 pages
Date of creation: Sep 2001
Date of revision:
Publication status: published in: Scandinavian Journal of Economics, 2003, 105 (4), 619-641
Handle: RePEc:iza:izadps:dp357

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Keywords: unemployment; Downward nominal wage rigidity; inflation; target; Germany;

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  1. Thanasis Stengos & Louis N. Christofides, 2002. "The symmetry of the wage-change distribution: Survey and contract data," Empirical Economics, Springer, vol. 27(4), pages 705-723.
  2. Stephen Nickell & Glenda Quintini, 2003. "Nominal wage rigidity and the rate of inflation," Economic Journal, Royal Economic Society, vol. 113(490), pages 762-781, October.
  3. David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc.
  4. Farès, J. & Hogan, S., 2000. "The Employment Costs of Downward Nominal-Wage Rigidity," Working Papers 00-1, Bank of Canada.
  5. Ernst Fehr & Lorenz Goette, 2007. "The Robustness and Real Consequences of Nominal Wage Rigidity," Kiel Working Papers 1343, Kiel Institute for the World Economy.
  6. 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.
  7. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
  8. David E. Lebow & Raven E. Saks & Beth Anne Wilson, 1999. "Downward nominal wage rigidity: evidence from the employment cost index," Finance and Economics Discussion Series 1999-31, Board of Governors of the Federal Reserve System (U.S.).
  9. Fehr, Ernst & Goette, Lorenz, 2005. "Robustness and real consequences of nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 779-804, May.
  10. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
  11. Steinar Holden, 2001. "Monetary Policy and Nominal Rigidities under Low Inflation," CESifo Working Paper Series 481, CESifo Group Munich.
  12. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
  13. Kenneth J. McLaughlin, 1999. "Are nominal wage changes skewed away from wage cuts?," Review, Federal Reserve Bank of St. Louis, issue May, pages 117-132.
  14. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December.
  15. Franz, Wolfgang, 2000. "Neues von der NAIRU?," ZEW Discussion Papers 00-41, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  16. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  17. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, vol. 38(5), pages 1021-1039, May.
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