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

  • Bauer, Thomas K.

    ()

    (RWI)

  • Bonin, Holger

    ()

    (ZEW Mannheim)

  • Sunde, Uwe

    ()

    (University of Munich)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 959.

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Length: 45 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:iza:izadps:dp959
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  1. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages C176-95, March.
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  17. Erica L. Groshen & Mark E. Schweitzer, 1996. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Staff Reports 9, Federal Reserve Bank of New York.
  18. Holden, Steinar, 1994. "Wage bargaining and nominal rigidities," European Economic Review, Elsevier, vol. 38(5), pages 1021-1039, May.
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