Downward nominal wage rigidity in the United States in times of economic distress and low inflation

Abstract

Rigidity in wages has long been thought to impede the functioning of labor markets. In this paper, we investigate how the degree of downward nominal wage rigidity in U.S. labor markets has changed over time using job-level data from a nationally representative establishment-based compensation survey collected by the Bureau of Labor Statistics. After defining two types of downward nominal rigidity (operative and potential) often used in macroeconomic models of business fluctuations, we employ three distinct methods to examine the magnitude of downward nominal rigidity in the U.S. labor market, whether each type of rigidity is more or less severe in the presence of negative economic shocks than in more normal economic times, and how the degree of rigidity changed as inflation trended downward. We find no evidence that the high degree of labor market distress during the Global Financial Crisis resulted in a change in the extent of potential downward rigidity in nominal wage changes, though we do observe a downward trend in potential rigidity as wage inflation fell over the broad stretch of our data. In contrast, we find that operative rigidity was both countercyclical and increased at lower rates of inflation. In addition, we find a much lower degree of both types of downward nominal rigidity at multi-year horizons.