Nominal Wage Rigidity in Village Labor Markets

Supreet Kaur

American Economic Review, 2019, vol. 109, issue 10, 3585-3616

Abstract: This paper develops a new approach to test for downward wage rigidity by examining transitory shocks to labor demand (i.e., rainfall) across 600 Indian districts. Nominal wages rise during positive shocks but do not fall during droughts. In addition, transitory positive shocks generate ratcheting: after they have dissipated, wages do not adjust back down. Ratcheting reduces employment by 9 percent, indicating that rigidities distort employment levels. Inflation, which is unaffected by local rainfall, enables downward real wage adjustments—offering causal evidence for its labor market effects. Surveys suggest that individuals believe nominal wage cuts are unfair and lead to effort reductions.

JEL-codes: E24 E31 J23 J31 O15 O18 R23 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20141625
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Citations: View citations in EconPapers (99)

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