Wage Rigidity, Inflation, and Institutions

Steinar Holden and Fredrik Wulfsberg

Scandinavian Journal of Economics, 2014, vol. 116, issue 2, 539-569

Abstract: We study the possible existence of downward nominal wage rigidity (DNWR) at wage growth rates different from zero in aggregate data. Even if DNWR prevails at zero for individual workers, compositional effects might lead to falling aggregate wages, while changes in relative wages combined with DNWR might lead to positive aggregate wage growth. We explore industry data for 19 OECD countries, over the 1971–2006 period. We find evidence for a floor on nominal wage growth at 6 percent in the 1970s and 1980s, at 1 percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that DNWR is stronger in country-years with strict employment protection legislation, high union density, centralized wage setting, and high inflation.

Date: 2014
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