Downward Nominal Wage Rigidity in the OECD

Steinar Holden and Fredrik Wulfsberg
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Steinar Holden: University of Oslo and Norges Bank
Fredrik Wulfsberg: Norges Bank

The B.E. Journal of Macroeconomics, 2008, vol. 8, issue 1

Abstract: Recent microeconomic studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries, but critics argue that the effect might be undone by compositional changes and flexibility in wages of new entrants. Using data for hourly nominal wages at industry level, we explore the existence of DNWR on industry wages in 19 OECD countries, over the period 1973-1999. We propose a novel method to detect DNWR. We reject the hypothesis of no DNWR in the overall sample. The fraction of wage cuts prevented due to DNWR has fallen over time, from 61 percent in the 1970s to 16 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when unemployment is low and union density is high. Strict employment protection legislation also leads to fewer wage cuts.

Keywords: downward nominal wage rigidity; OECD; employment protection legislation; wage setting (search for similar items in EconPapers)
JEL-codes: E3 J3 J5 (search for similar items in EconPapers)
Date: 2008

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Persistent link: http://EconPapers.repec.org/RePEc:bpj:bejmac:v:8:y:2008:i:1:n:15

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