Downward Nominal Rigidity in West German Earnings, 1975–95

Thomas Beissinger () and Christoph Knoppik

German Economic Review, 2001, vol. 2, issue 4, 385-417

Abstract: If downward nominal wage rigidity exists, it should affect the distribution of earnings changes. We present a common analytical framework for three distinct and previously unconnected approaches to the analysis of downward nominal rigidity, the skewness–location approach, the symmetry approach and the histogram–location approach. We modify them by dropping the assumption of time‐invariant rigidity and apply them to earnings data from the IAB‐Beschftigtenstichprobe (IABS). We find that the distribution of West German log earnings changes is indeed affected by downward nominal rigidity. Our modification of the approaches also allows us to find that the degree of nominal rigidity depends on business cycle conditions, with weaker rigidity in times of rising unemployment. Our findings support the critics of very low inflation targets.

Date: 2001
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