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Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Micro Data

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  • Bauer, Thomas K.

    ()
    (RWI)

  • Bonin, Holger

    ()
    (ZEW Mannheim)

  • Sunde, Uwe

    ()
    (University of Munich)

Abstract

The paper examines real and nominal wage rigidities. We estimate a switching regime model, in which the observed distribution of individual wage changes, computed from West German register data for 1976-1997, is generated by simultaneous processes of real, nominal or no wage rigidity, and measurement error. The fraction of workers facing wage increases that are due to nominal, but mostly real wage rigidity is substantial. The extent of real rigidity rises with inflation, whereas the opposite holds for nominal rigidity. Overall, the incidence of wage rigidity, which accelerates unemployment growth, is most likely minimized in an environment with moderate inflation.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 959.

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Length: 45 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:iza:izadps:dp959

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Keywords: West Germany; collective bargaining; real effects of inflation; downward wage rigidity; switching regime model;

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  1. Stephen Nickell & Glenda Quintini, 2003. "Nominal wage rigidity and the rate of inflation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(490), pages 762-781, October.
  2. Louis Christofides & Thanasis Stengos, 2001. "Nominal Wage Rigidity: Non-Parametric Tests Based on Union Data for Canada," CESifo Working Paper Series 535, CESifo Group Munich.
  3. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, American Economic Association, vol. 62(1), pages 1-18, March.
  4. Caballero, R.J. & Hammour, M.L., 1991. "The Cleansing Effect of Recessions," Discussion Papers, Columbia University, Department of Economics 1991_59, Columbia University, Department of Economics.
  5. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
  6. David Card & Dean Hyslop, 1997. "Does Inflation “Grease the Wheels of the Labor Market”?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122 National Bureau of Economic Research, Inc.
  7. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 34(3), pages 383-414, December.
  8. Campbell, Carl M, III & Kamlani, Kunal S, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(3), pages 759-89, August.
  9. Fitzenberger, Bernd & Franz, Wolfgang, 1999. "Industry-Level Wage Bargaining: A Partial Rehabilitation--The German Experience," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(4), pages 437-57, September.
  10. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 83(4), pages 811-37, September.
  11. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 993-1008, December.
  12. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(462), pages C176-95, March.
  13. 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.
  14. Erica L. Groshen & Mark E. Schweitzer, 1994. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Working Paper 9418, Federal Reserve Bank of Cleveland.
  15. Ernst Fehr & Armin Falk, 1999. "Wage Rigidity in a Competitive Incomplete Contract Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(1), pages 106-134, February.
  16. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, Elsevier, vol. 38(5), pages 1021-1039, May.
  17. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 451-72, June.
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