Nominal contracting theories of unemployment: evidence from panel data

Michael Keane ()

No 27, Discussion Paper / Institute for Empirical Macroeconomics from Federal Reserve Bank of Minneapolis

Abstract: This paper examines the response of real wages and employment probabilities to nominal shocks using micro-panel data from the National Longitudinal Survey of Young Men. Both economy-wide and sector-specific responses to nominal shocks are examined. The observed response patterns are inconsistent with nominal contract based theories of unemployment. These theories predict that nominal surprises should be negatively correlated with real wages in sectors with nominal contracting. In fact, inflation surprises are found to be essentially uncorrelated with real wages in all sectors, while money growth surprises are positively correlated with real wages in manufacturing and uncorrelated with real wages elsewhere. The positive real wage-money growth correlation in manufacturing is robust to controls for real shocks and business cycle conditions, so it does not appear to be explicable by real business cycle models with endogenous money. The type of model described by McCallum (1980, 1986), in which commodity prices are more rigid than wages, is consistent with the result.

Keywords: Unemployment; Wages (search for similar items in EconPapers)
Date: 1990
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Journal Article: Nominal-Contracting Theories of Unemployment: Evidence from Panel Data (1993)
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