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Does downward nominal wage rigidity dampen wage increases?

  • Stüber, Heiko
  • Beissinger, Thomas

Focusing on the compression of wage cuts, many empirical studies find a high degree of downward nominal wage rigidity (DNWR). However, the resulting macroeconomic effects seem to be surprisingly weak. This contradiction can be explained within an intertemporal framework in which DNWR not only prevents nominal wage cuts but also induces firms to compress wage increases. We analyze whether a compression of wage increases occurs when DNWR is binding by applying Unconditional Quantile Regression and Seemingly Unrelated Regression to a data set comprising more than 169 million wage changes. We find evidence for a compression of wage increases and only very small effects of DNWR on average real wage growth. The results indicate that DNWR does not provide a strong argument against low inflation targets.

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Paper provided by University of Hohenheim, Center for Research on Innovation and Services (FZID) in its series FZID Discussion Papers with number 22-2010.

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Date of creation: 2010
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Handle: RePEc:zbw:fziddp:222010
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  10. David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc.
  11. Andreas Behr & Ulrich Pötter, 2010. "Downward Wage Rigidity in Europe: A New Flexible Parametric Approach and Empirical Results," German Economic Review, Verein für Socialpolitik, vol. 11, pages 169-187, 05.
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  23. Stüber, Heiko & Beissinger, Thomas, 2010. "Does downward nominal wage rigidity dampen wage increases?," IAB Discussion Paper 201016, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
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