Evaluating the Economic Significance of Downward Nominal Wage Rigidity

Michael Elsby

No 12611, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The existence of downward nominal wage rigidity has been abundantly documented, but what are its economic implications? This paper demonstrates that, even when wages are allocative, downward wage rigidity can be consistent with weak macroeconomic effects. Firms have an incentive to compress wage increases as well as wage cuts when downward wage rigidity binds. By neglecting compression of wage increases, previous literature may have overstated the costs of downward wage rigidity to firms. Using microdata from the US and Great Britain, I find that evidence for compression of wage increases when downward wage rigidity binds. Accounting for this reduces the estimated increase in aggregate wage growth due to wage rigidity to be much closer to zero. These results suggest that downward wage rigidity may not provide a strong argument against the targeting of low inflation rates.

JEL-codes: E24 E31 J30 J41 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-cba, nep-lab and nep-mac
Note: LS ME EFG
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Citations: View citations in EconPapers (15)

Published as Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March.

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Related works:
Journal Article: Evaluating the economic significance of downward nominal wage rigidity (2009)
Working Paper: Evaluating the Economic Significance of Downward Nominal Wage Rigidity (2005)
Working Paper: Evaluating the economic significance of downward nominal wage rigidity (2005)
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