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Wage Rigidity, Inflation, and Institutions

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  • Steinar Holden
  • Fredrik Wulfsberg

Abstract

We study the possible existence of downward nominal wage rigidity (DNWR) at wage growth rates different from zero in aggregate data. Even if DNWR prevails at zero for individual workers, compositional effects might lead to falling aggregate wages, while changes in relative wages combined with DNWR might lead to positive aggregate wage growth. We explore industry data for 19 OECD countries, over the 1971–2006 period. We find evidence for a floor on nominal wage growth at 6 percent in the 1970s and 1980s, at 1 percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that DNWR is stronger in country-years with strict employment protection legislation, high union density, centralized wage setting, and high inflation.

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  • Steinar Holden & Fredrik Wulfsberg, 2014. "Wage Rigidity, Inflation, and Institutions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(2), pages 539-569, April.
    • Handle: RePEc:bla:scandj:v:116:y:2014:i:2:p:539-569
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    4. Fongoni, Marco & Dickson, Alex, 2015. "A Theory of Wage Setting Behavior," SIRE Discussion Papers 2015-57, Scottish Institute for Research in Economics (SIRE).
    5. Domeij, David & Ellingsen, Tore, 2015. "Rational Bubbles and Economic Crises: A Quantitative Analysis," SSE Working Paper Series in Economics 2015:1, Stockholm School of Economics.
    6. Johannes Matschke & Jun Nie, 2022. "Downward Wage Rigidities and Recession Dynamics in Advanced and Emerging Economies," Research Working Paper RWP 22-10, Federal Reserve Bank of Kansas City.
    7. Agudelo, Sonia A. & Sala, Hector, 2017. "Wage Rigidities in Colombia: Measurement, Causes, and Policy Implications," IZA Discussion Papers 10669, Institute of Labor Economics (IZA).
    8. Dickson, Alex & Fongoni, Marco, 2019. "Asymmetric reference-dependent reciprocity, downward wage rigidity, and the employment contract," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 409-429.
    9. Anja Deelen, 2019. "Flexible Wages or Flexible Workers?," CPB Discussion Paper 405.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Patrick J. Coe, 2018. "Downward nominal wage rigidity: Evidence from Canada 19011950," Canadian Journal of Economics, Canadian Economics Association, vol. 51(3), pages 946-967, August.
    11. Anja Deelen, 2021. "Flexible Wages or Flexible Workers? A Decomposition of Wage Bill Adjustment by Dutch Firms, 2006–2013," De Economist, Springer, vol. 169(2), pages 179-209, May.
    12. Anja Deelen & Wouter Verbeek, 2015. "Measuring Downward Nominal and Real Wage Rigidity - Why Methods Matter," CPB Discussion Paper 315.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    13. Morin, Annaïg, 2017. "Cyclicality of wages and union power," Labour Economics, Elsevier, vol. 48(C), pages 1-22.
    14. Anja Deelen, 2019. "Flexible Wages or Flexible Workers?," CPB Discussion Paper 405, CPB Netherlands Bureau for Economic Policy Analysis.

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