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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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  1. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April.
  2. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," NBER Working Papers 2115, National Bureau of Economic Research, Inc.
  3. Dutkowsky, Donald H & Atesoglu, H Sonmez, 1993. "Wage Contracting in the Macroeconomy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 62-78, February.
  4. 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.).
  5. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
  6. Waldo, Douglas G., 1981. "Sticky nominal wages and the optimal employment rule," Journal of Monetary Economics, Elsevier, vol. 7(3), pages 339-353.
  7. Cho, Jang-Ok & Cooley, Thomas F, 1995. "The Business Cycle with Nominal Contracts," Economic Theory, Springer, vol. 6(1), pages 13-33, June.
  8. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
  9. Card, David, 1990. "Unexpected Inflation, Real Wages, and Employment Determination in Union Contracts," American Economic Review, American Economic Association, vol. 80(4), pages 669-88, September.
  10. Marcello Estevao & Stacey Tevlin, 1995. "The role of profits in wage determination: evidence from US manufacturing," Finance and Economics Discussion Series 95-48, Board of Governors of the Federal Reserve System (U.S.).
  11. Blanchflower, David G & Oswald, Andrew J & Sanfey, Peter, 1996. "Wages, Profits, and Rent-Sharing," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 227-51, February.
  12. Fair, Ray C, 1979. "An Analysis of the Accuracy of Four Macroeconometric Models," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 701-18, August.
  13. Mark Bils, 1989. "Testing for Contracting Effects on Employment," NBER Working Papers 3051, National Bureau of Economic Research, Inc.
  14. Michael A. Curme & Barry T. Hirsch & David A. Macpherson, 1990. "Union membership and contract coverage in the United States, 1983รป1988," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 44(1), pages 5-33, October.
  15. In-Moo Kim & Prakash Loungani, 1991. "The role of energy in real business cycle models," Working Paper Series, Macroeconomic Issues 91-6, Federal Reserve Bank of Chicago.
  16. Gottfries, Nils, 1992. "Insiders, Outsiders, and Nominal Wage Contracts," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 252-70, April.
  17. Frederic S. Mishkin, 1981. "Does Anticipated Aggregate Demand Policy Matter? Further Econometric results," NBER Working Papers 0789, National Bureau of Economic Research, Inc.
  18. Andrew Oswald, 1984. "Efficient Contracts are on the Labour Demand Curve: Theory and Facts," Working Papers 555, Princeton University, Department of Economics, Industrial Relations Section..
  19. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  20. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  21. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  22. 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.
  23. Gordon, Robert J, 1988. "The Role of Wages in the Inflation Process," American Economic Review, American Economic Association, vol. 78(2), pages 276-83, May.
  24. 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.
  25. Montgomery, Edward & Shaw, Kathryn, 1985. "Long-term contracts, expectations and wage inertia," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 209-226, September.
  26. Prescott, David & Wilton, David, 1992. "The Determinants of Wage Changes in Indexed.and Nonindexed Contracts: A Switching Model," Journal of Labor Economics, University of Chicago Press, vol. 10(3), pages 331-55, July.
  27. Richard B. Freeman & James L. Medoff, 1979. "New estimates of private sector unionism in the United States," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 32(2), pages 143-174, January.
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