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Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Micro Data

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  • Bauer, Thomas K.

    (RWI)

  • Bonin, Holger

    (IZA)

  • Sunde, Uwe

    (University of Munich)

Abstract

The paper examines real and nominal wage rigidities. We estimate a switching regime model, in which the observed distribution of individual wage changes, computed from West German register data for 1976-1997, is generated by simultaneous processes of real, nominal or no wage rigidity, and measurement error. The fraction of workers facing wage increases that are due to nominal, but mostly real wage rigidity is substantial. The extent of real rigidity rises with inflation, whereas the opposite holds for nominal rigidity. Overall, the incidence of wage rigidity, which accelerates unemployment growth, is most likely minimized in an environment with moderate inflation.

Suggested Citation

  • Bauer, Thomas K. & Bonin, Holger & Sunde, Uwe, 2003. "Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Micro Data," IZA Discussion Papers 959, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp959
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    References listed on IDEAS

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    More about this item

    Keywords

    West Germany; collective bargaining; real effects of inflation; downward wage rigidity; switching regime model;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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