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Evidence on nominal wage rigidity from a panel of U.S. manufacturing industries

  • Vivek Ghosal
  • Prakash Loungani

Using annual data for 450 manufacturing industries over the period 1958 to 1989, we establish the following stylized facts on the response of industry nominal wage growth to aggregate and industry influences: ; 1. We find support for the canonical wage contracts model outlined in Blanchard and Fischer (1989). The elasticity of response of nominal wage growth to expected inflation is 0.7. The dasticity of nominal wage growth with respect to changes in unexpected inflation is 0.1. ; 2. These elasticity estimates are robust to splitting the sample along various dimensions: level of unionization, durability of the product, and industry contract length. The elasticity of nominal wage growth to expected inflation ranges from 0.6 to 0.8; the elasticity with respect to unexpected inflation is between 0.1 and 0.2. ; 3. We find support for the multi-sector wage indexation models of Duca and VanHoose (199] ) and others. The profit-sharing elasticity (the response of industry wage growth to industry profit growth) is positive, as hypothesized in these models. The instrumental variable estimates of the profit-sharing elasticity range from 0.1 to 0.3.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 512.

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Date of creation: 1995
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Handle: RePEc:fip:fedgif:512
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  9. Ahmed, Shaghil, 1987. "Wage stickiness and the non-neutrality of money : A cross-industry analysis," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 25-50, July.
  10. Montgomery, Edward & Shaw, Kathryn, 1985. "Long-term contracts, expectations and wage inertia," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 209-226, September.
  11. David G. Blanchflower & Andrew J. Oswald & Peter Sanfey, 1992. "Wages, Profits and Rent-Sharing," NBER Working Papers 4222, National Bureau of Economic Research, Inc.
  12. Charles A. Fleischman, 1999. "The causes of business cycles and the cyclicality of real wages," Finance and Economics Discussion Series 1999-53, Board of Governors of the Federal Reserve System (U.S.).
  13. Oswald, A. J., 1995. "Efficient contracts are on the labour demand curve: Theory and facts," Labour Economics, Elsevier, vol. 2(1), pages 102-102, March.
  14. Ray C. Fair, 1978. "An Analysis of the Accuracy of Four Macroeconometric Models," Cowles Foundation Discussion Papers 492, Cowles Foundation for Research in Economics, Yale University.
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  20. Michael A. Curme & Barry T. Hirsch & David A. MacPherson, 1990. "Union Membership and Contract Coverage in the United States, 1983–1988," ILR Review, Cornell University, ILR School, vol. 44(1), pages 5-33, October.
  21. Duca, John V & VanHoose, David D, 1991. "Optimal Wage Indexation in a Multisector Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 859-67, November.
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