The relative adjustment of wages and prices: direct tests within a multiple-equation system

Martin Schmidt

Applied Economics, 2003, vol. 35, issue 8, 985-997

Abstract: In order to assess the relative rigidity of the aggregate price level and the nominal wage rate most researchers have focused on the implied behaviour of the real wage rate in response to a purely demand disturbance. The present work examines the explicit behaviour of the two variables and is therefore able to analyse the variables' short-run responses within the context of their defined long-run behaviour. While the paper reports evidence of long-run stability in the real wage rate, additional evidence is presented which supports both sticky-price and sticky-wage models. The determining factor is the choice of lag.

Date: 2003
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DOI: 10.1080/0003684032000056779

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