Missing Wage Inflation? Downward Wage Rigidity and the Natural Rate of Unemployment

Yuto Iwasaki, Ichiro Muto and Mototsugu Shintani

No 18-E-3, Bank of Japan Research Laboratory Series from Bank of Japan

Abstract: In recent years, advanced economies, including Japan, have experienced a weak response of wage inflation to the decline in the unemployment rate (i.e. missing wage inflation). In this study, we investigate whether downward wage rigidity (DWR) in recession periods can be a source of this weak wage response. Specifically, we jointly estimate the degree of DWR as well as the natural rate of unemployment using a nonlinear DSGE model with asymmetric adjustment costs. We show that wage adjustment costs are highly asymmetric in Japan, the euro area, and the UK; especially, a clear L-shaped wage Phillips curve between wage inflation and the unemployment gap (i.e. the actual unemployment rate minus the natural rate) is obtained in Japan. We argue that missing wage inflation is attributable to DWR and wage inflation is likely to reappear under the tight labor market conditions.

Keywords: wage; natural rate of unemployment; downward wage rigidity; Phillips curve; nonliner DSGE model (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
Date: 2018-09-25
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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