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Downward Nominal Wage Flexibility: Real or Measurement Error?

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  • Peter Gottschalk

    (Boston College)

Abstract

This paper presents a new method to correct for measurement error in wage data and applies this method to address an old question. How much downward wage flexibility is there in the U.S? We apply standard methods developed by Bai and Perron (1998b) to identify structural breaks in time series data. Applying these methods to wage histories allows us to identify when each person experienced a change in nominal wages. The length of the period of constant nominal wages is left unrestricted and is allowed to differ across individuals, as is the size and direction of the nominal wage change. We apply these methods to data from the Survey of Income and Program Participation. The evidence we provide indicates that the probability of a cut in nominal wages is substantially overstated in data that is not corrected for measurement error.

Suggested Citation

  • Peter Gottschalk, 2004. "Downward Nominal Wage Flexibility: Real or Measurement Error?," Boston College Working Papers in Economics 611, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:611
    Note: This paper is also available as IZA Discussion Paper No. 1327
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    References listed on IDEAS

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    More about this item

    Keywords

    nominal wage rigidity; measurement error;

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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