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Wage Rigidity and Disinflation in Emerging Countries

  • Messina, Julián

    ()

    (Inter-American Development Bank)

  • Sanz-de-Galdeano, Anna

    ()

    (Universidad de Alicante)

This paper examines the consequences of rapid disinflation for downward wage rigidities in two emerging countries, Brazil and Uruguay, relying on high quality matched employer-employee administrative data. Downward nominal wage rigidities are more important in Uruguay, while wage indexation is dominant in Brazil. Two regime changes are observed during the sample period, 1995-2004: (i) in Uruguay wage indexation declines, while workers' resistance to nominal wage cuts becomes more pronounced; and (ii) in Brazil, the introduction of inflation targeting by the Central Bank in 1999 shifts the focal point of wage negotiations from changes in the minimum wage to expected inflation. These regime changes cast doubts on the notion that wage rigidity is structural in the sense of Lucas (1976).

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5778.

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Length: 42 pages
Date of creation: Jun 2011
Date of revision:
Publication status: published in: American Economic Journal: Macroeconomics, 2014, 6 (1), 102-133
Handle: RePEc:iza:izadps:dp5778
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