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Nominal Wage Rigidity in Australia

Author

Listed:
  • Jacqueline Dwyer

    (Reserve Bank of Australia)

  • Kenneth Leong

    (Reserve Bank of Australia)

Abstract

The existence of downward nominal price and wage rigidity has been used to argue against the adoption of zero inflation targets. A good deal is known about the nature and extent of price flexibility in Australia. However, little is known about nominal wage flexibility since investigations have been hindered by a lack of suitable data. Using a unique and unpublished microdata set, we find strong evidence of downward nominal wage rigidity. The idea that firms are able to circumvent wage rigidity by varying broader forms of remuneration is not supported by our study. We find that these broad measures are still skewed away from pay cuts, though to a lesser extent than wages. Not all of the observed rigidity is binding, though, since skewness away from wage cuts appears to occur for reasons other than downward wage rigidity. However, the extent of rigidity we do observe lends support to the pursuit of small positive rates of inflation as an objective of monetary policy.

Suggested Citation

  • Jacqueline Dwyer & Kenneth Leong, 2000. "Nominal Wage Rigidity in Australia," RBA Research Discussion Papers rdp2000-08, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2000-08
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    File URL: https://www.rba.gov.au/publications/rdp/2000/pdf/rdp2000-08.pdf
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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