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Nominal contracting theories of unemployment: evidence from panel data


  • Michael P. Keane


This paper examines the response of real wages and employment probabilities to nominal shocks using micro-panel data from the National Longitudinal Survey of Young Men. Both economy-wide and sector-specific responses to nominal shocks are examined. The observed response patterns are inconsistent with nominal contract based theories of unemployment. These theories predict that nominal surprises should be negatively correlated with real wages in sectors with nominal contracting. In fact, inflation surprises are found to be essentially uncorrelated with real wages in all sectors, while money growth surprises are positively correlated with real wages in manufacturing and uncorrelated with real wages elsewhere. The positive real wage-money growth correlation in manufacturing is robust to controls for real shocks and business cycle conditions, so it does not appear to be explicable by real business cycle models with endogenous money. The type of model described by McCallum (1980, 1986), in which commodity prices are more rigid than wages, is consistent with the result.

Suggested Citation

  • Michael P. Keane, 1990. "Nominal contracting theories of unemployment: evidence from panel data," Discussion Paper / Institute for Empirical Macroeconomics 27, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmem:27

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    References listed on IDEAS

    1. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    2. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, number ghez75-1, January.
    3. Wilbur John Coleman, 1988. "Money, interest, and capital in a cash-in-advance economy," International Finance Discussion Papers 323, Board of Governors of the Federal Reserve System (U.S.).
    4. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
    5. Jean-Pierre DANTHINE & John B. DONALDSON, 1988. "Efficiency Wages and the Real Business Cycle," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 8803, Université de Lausanne, Faculté des HEC, DEEP.
    6. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
    7. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
    8. Hausman, Jerry A & Poterba, James M, 1987. "Household Behavior and the Tax Reform Act of 1986," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 101-119, Summer.
    9. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January.
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    Cited by:

    1. Jovanic, Boyan & Ueda, Masako, 1997. "Contracts and Money," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 700-708, August.
    2. Guangjie Ning, 2008. "Wage forming mechanism in the market transitional process of China (1993–2005): Evidence from the provincial panel data," Psychometrika, Springer;The Psychometric Society, vol. 3(2), pages 312-326, June.
    3. Keane, Michael, 2010. "The Tax-Transfer System and Labour Supply," MPRA Paper 55167, University Library of Munich, Germany.
    4. Peter Gottschalk, 2005. "Downward Nominal-Wage Flexibility: Real or Measurement Error?," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 556-568, August.

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    Unemployment ; Wages;


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