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The interaction of labor markets and inflation: analysis of micro data from the International Wage Flexibility Project

Author

Listed:
  • William T. Dickens
  • Lorenz Goette
  • Erica L. Groshen
  • Steinar Holden
  • Julian Messina
  • Mark E. Schweitzer
  • Jarkko Turunen
  • Melanie Ward

Abstract

Inflation can ?grease? the wheels of economic adjustment in the labor market by relieving the constraint imposed by downward nominal wage rigidity, but not if there is also substantial downward real wage rigidity. At the same time, inflation can throw ?sand? in the wheels of economic adjustment by degrading the value of price signals. A number of recent studies suggest that wage rigidity is much more important for business cycles and monetary policy than previously believed (see Erceg, Henderson and Levin, 2000, Smets and Wouters, 2003, and Hall, 2005). Thus, our results on how wage rigidity and other labor market imperfections vary between countries and how they are affected by the rate of inflation should be of considerable value in formulating monetary policy and conducting related research.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedfpr:y:2006:x:4
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    Citations

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    Cited by:

    1. Philip Du Caju & Catherine Fuss & Ladislav Wintr, 2012. "Downward Wage Regidity for Different Workers and Firms," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(1), pages 5-32.
    2. Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.
    3. 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," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 195-214, Spring.
    4. Tomi Kyyrä & Mika Maliranta, 2008. "The micro-level dynamics of declining labour share: lessons from the Finnish great leap ," Industrial and Corporate Change, Oxford University Press, vol. 17(6), pages 1147-1172, December.
    5. Fuss, Catherine, 2008. "How do firms adjust their wage bill in Belgium? A decomposition along the intensive and extensive margins," Working Paper Series 854, European Central Bank.
    6. Mongelli, Francesco Paolo & Vega, Juan Luis, 2006. "What effects is EMU having on the euro area and its member countries? An overview," Working Paper Series 599, European Central Bank.
    7. Du Caju, Philip & Fuss, Catherine & Wintr, Ladislav, 2009. "Understanding sectoral differences in downward real wage rigidity: workforce composition, institutions, technology and competition," Working Paper Series 1006, European Central Bank.
    8. Kotilainen, Markku, "undated". "Finland's Experiences and Challenges in the Euro Zone," Discussion Papers 1040, The Research Institute of the Finnish Economy.
    9. Andreas Behr & Ulrich Pötter, 2010. "Downward Wage Rigidity in Europe: A New Flexible Parametric Approach and Empirical Results," German Economic Review, Verein für Socialpolitik, vol. 11, pages 169-187, May.
    10. Petri Böckerman & Seppo Laaksonen & Jari Vainiomäki, 2010. "Micro and Macro Level Wage Rigidity: Lessons from Finland," Finnish Economic Papers, Finnish Economic Association, vol. 23(1), pages 27-42, Spring.
    11. International Monetary Fund, 2012. "Ireland: Selected Issues," IMF Staff Country Reports 2012/265, International Monetary Fund.
    12. Catherine Fuss & Ladislav Wintr, 2012. "Rigid Wages and Flexible Employment ?Contrasting Responses to Firm-Level and Sector-Level Productivity Developments," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(3), pages 241-268.
    13. Claudia M. Buch, 2013. "From the Stability Pact to ESM - What Next?," Chapters, in: Andreas Dombret & Otto Lucius (ed.), Stability of the Financial System, chapter 5, Edward Elgar Publishing.
    14. Steinar Holden & Fredrik Wulfsberg, 2007. "Are real wages rigid downwards?," Working Paper 2007/01, Norges Bank.
    15. Patrick Lünnemann & Ladislav Wintr, 2010. "Downward wage rigidity and automatic wage indexation: Evidence from monthly micro wage data," BCL working papers 48, Central Bank of Luxembourg.
    16. Jari Vainiomäki, 2020. "The development of wage dispersion and wage rigidity in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 29(1), pages 1-32, Spring.
    17. Fuss, Catherine & Wintr, Ladislav, 2009. "Rigid labour compensation and flexible employment? Firm-level evidence with regard to productivity for Belgium," Working Paper Series 1021, European Central Bank.
    18. Chinhui Juhn & Kristin McCue & Holly Monti & Brooks Pierce, 2018. "Firm Performance and the Volatility of Worker Earnings," Journal of Labor Economics, University of Chicago Press, vol. 36(S1), pages 99-131.
    19. George A. Akerlof & William T. Dickens, 2007. "Unfinished Business in the Macroeconomics of Low Inflation: A Tribute to George and Bill by Bill and George," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2), pages 31-48.
    20. Ana Buisán & Fernando Restoy, 2005. "Cross country macroeconomic heterogeneity in EMU," Occasional Papers 0504, Banco de España.
    21. Steinar Holden & Fredrik Wulfsberg, 2007. "How strong is the case for downward real wage rigidity?," Working Papers 07-6, Federal Reserve Bank of Boston.
    22. Fuss, Catherine & Wintr, Ladislav & Du Caju, Philip, 2007. "Downward wage rigidity for different workers and firms: an evaluation for Belgium using the IWFP procedure," Working Paper Series 840, European Central Bank.

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