Revisiting Real Wage Rigidity

Michael Ellington (m.ellington@liverpool.ac.uk), Christopher Martin and Bingsong Wang
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Michael Ellington: Management School, University of Liverpool, Liverpool L69 7ZH UK

No 2022015, Working Papers from The University of Sheffield, Department of Economics

Abstract: In this paper, we provide empirical evidence that real wage rigidity is not a major cause of unemployment volatility. We argue that there is a disconnect between the theoretical and empirical literatures on this topic. While theoretical studies define real wage rigidity as the response of wages to changes in unemployment following productivity shocks, the empirical literature measures real wage rigidity as the estimated semi-elasticity of wages with respect to unemployment, averaged over all shocks. We show that averaging over shocks gives a biased measure of real wage rigidity, as the impact of other shocks confounds the response to productivity shocks. Our results indicate that the estimated semi-elasticity with respect to productivity shocks is twice as large as the estimated semi-elasticity averaged over all shocks. This implies that one cannot attribute unemployment volatility to real wage rigidity.

Keywords: real wage rigidity; time-varying parameter model; real wages; search frictions (search for similar items in EconPapers)
JEL-codes: E23 E32 J23 J30 J64 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2022-09
New Economics Papers: this item is included in nep-lma
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https://www.sheffield.ac.uk/economics/research/serps First version, September 2022 (application/pdf)

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Journal Article: Revisiting Real Wage Rigidity (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2022015

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