Downward Nominal Wage Rigidity Research Articles

Downward Nominal Wage Rigidity and Determinacy of Equilibrium

AbstractIt is well known in the literature that there is a tension between the frequency and duration of the zero lower bound (ZLB) on the nominal interest rate and the determinacy of equilibrium. In this short paper, I show that the presence of downward nominal wage rigidity (DNWR) resolves the tension by preventing a vicious cycle of price declines and output contractions under the ZLB. Consequently, the model with DNWR can replicate the long‐lived ZLB episodes observed in the data. It also implies a plausible size of output and inflation declines at the ZLB.

The extent of downward nominal wage rigidity: New evidence from payroll data

We use over a decade of representative payroll data from Great Britain to study the nominal wage changes of employees who stayed in the same job for at least one year. We show that basic hourly pay drives the cyclicality of marginal labour costs, making this the most relevant measure of wages for macroeconomic models that incorporate wage rigidity. Basic hourly pay adjusts much less frequently than previously thought in Britain, particularly in small firms. We find that firms compress wage growth when inflation is low, which indicates that downward rigidity constrains firms' wage setting. We demonstrate that the empirical extent of downward nominal wage rigidity (DNWR) can theoretically cause considerable long-run output losses. Combined, our results all point to the importance of including DNWR in macroeconomic and monetary policy models.

Revisiting the optimal inflation rate with downward nominal wage rigidity: The role of heterogeneity

In this paper, I study the optimal inflation rate in a sticky price economy where workers are heterogeneous in labor productivity and wage changes are subject to asymmetric adjustment costs. The model calibrated to U.S. micro wage data implies downward nominal wage rigidity (DNWR). The optimal inflation rate is substantially higher than stated in the literature in the presence of worker heterogeneity. A key to understanding the result is that DNWR causes a cross-sectional misallocation of labor as well as inefficient aggregate dynamics, enlarging the “grease the wheels” effect of inflation.

State Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations

State Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations

Heterogeneous Downward Nominal Wage Rigidity: Foundations of a Static Wage Phillips Curve

Heterogeneous Downward Nominal Wage Rigidity: Foundations of a Static Wage Phillips Curve

On the Long-Run Unemployment, Inflation, and Volatility

This paper revisits the relationship between unemployment and inflation in the long-run through the lens of a New-Keynesian model augmented with downward nominal wage rigidity (DNWR). It finds that when the labor market is affected by DNWR, this relationship goes beyond the tradeoff between the first moments of unemployment and inflation provided by the short-run Phillips curve. Higher volatility in inflation raises unemployment at the low-frequency. Increased volatility in inflation makes nominal wages more volatile but the downward rigidity constrains nominal wages from falling. Unemployment is therefore more likely to increase above the natural level to guarantee the labor market equilibrium. The theoretical findings are robust to different formalizations of DNWR and to workers that are assumed as forward-looking of DNWR. Panel regressions test the positive long-run co-movement between unemployment and inflation volatility using the data from the OECD countries. The sensitivity analysis confirms the evidence for several controls and regression specifications.

State-dependent fiscal multipliers in NORA - A DSGE model for fiscal policy analysis in Norway

We develop a novel medium-scale DSGE model, called NORA, for fiscal policy analysis in Norway. NORA contains a sheltered and exposed sector allowing us to model wage bargaining between a labor union and the exposed sector, reflecting Scandinavian wage formation institutions. Wages are subject to a downward nominal wage rigidity (DNWR). Inspired by many countries' fiscal policy responses to the Great Recession and the coronavirus pandemic, we investigate the model's ability to generate state-dependent fiscal multipliers. We find, that both the zero lower bound on nominal interest rates and DNWR individually can account for higher fiscal multipliers during recessions. In joint presence, however, the existence of DNWR reduces the multiplier at the ZLB. Moreover, the DNWR significantly relaxes the paradox of toil at the ZLB. We show that the state-dependency is robust to alternative assumptions about the origin of the recession, the nature of the fiscal stimulus and its financing source.

Downward Nominal Wage Rigidity and Determinacy of Equilibrium

It is well known that there is a tension between the frequency and duration of the zero lower bound on the nominal interest rate (ZLB) and the determinacy of equilibrium. In this article, I show that the presence of downward nominal wage rigidity (DNWR) resolves the tension by preventing a vicious cycle of price declines and output contractions under the ZLB. Consequently, the model with DNWR can replicate the long-lived ZLB episodes observed in the data.

(Dis)Solving the Zero Lower Bound Equilibrium Through Income Policy

We investigate the possibility to reflate an economy experiencing a long-lasting zero lower bound episode with subdued or negative inflation, by imposing a minimum level of wage inflation. Our proposed income policy relies on the same mechanism behind past disinflationary policies, but it works in the opposite direction. It is formalized as a downward nominal wage rigidity (DNWR) such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows to dissolve the zero lower bound steady state equilibrium in an OLG model featuring “secular stagnation” and in a infinite-life model, where this equilibrium emerges due to deflationary expectations.

Downward nominal wage rigidity in Canada: Evidence from micro‐level data

AbstractWe assess the importance of downward nominal wage rigidity (DNWR) in Canada using employer‐level administrative data from the major wage settlements (MWS) and household‐based survey data from the Survey of Labour Income Dynamics (SLID). MWS data cover large unionized firms in Canada, while SLID is a rich rotating panel representative of the employed population in Canada. Combining both sources of information allows for an extensive analysis of DNWR in the Canadian labour market. We find large shares of wage freezes and smaller shares of wage cuts in both MWS and SLID. Shares of freezes are higher at lower CPI inflation rates, based on provincial data. These observations are consistent with the presence of DNWR. DNWR in Canada appears to be larger than in other countries such as the United States, the United Kingdom and European countries. The incidence of DNWR is heterogeneous across firms’ and workers’ characteristics. Wages report less DNWR over longer horizons.

Downward nominal wage rigidity in Canada: Evidence against a “greasing effect”

AbstractThe existence of downward nominal wage rigidity (DNWR) has often been used to justify a positive inflation target. It is traditionally assumed that positive inflation could “grease the wheels” of the labour market by putting downward pressure on real wages, easing labour market adjustments during a recession. A rise in the inflation target would attenuate the long‐run level of unemployment and hasten economic recovery after an adverse shock. Following Daly and Hobijn (2014), we re‐examine these issues in a model that accounts for precautionary motives in wage‐setting behaviour. We confirm that DNWR generates a long‐run negative relationship between inflation and unemployment, in line with previous contributions to the literature. However, we also find that the increase in the number of people bound by DNWR following a negative demand shock rises with the inflation target, offsetting the beneficial effects a higher inflation target has on closing the unemployment gap. As an implication, contrary to previous contributions that neglected precautionary behaviour, the speed at which unemployment returns back to pre‐crisis levels during recessions is relatively unaffected by variations in the inflation target.

Nominal Wage Rigidity in the EU Countries Before and after the Great Recession: Evidence from the WDN Surveys

This paper studies the recent trends in nominal wage rigidity in a large group of EU countries, using survey data. We analyse two forms of nominal wage rigidity: downward nominal wage rigidity (DNWR) and the lagged response of wages to shocks. The frequency of wage changes, which is an indicator of lagged wage setting, slowed down in the aftermath of the Great Recession. We assess the possible reasons for this and show that it was at least partially caused by a combination of a decline in average wage growth and persistent DNWR. In countries where wage growth slowed down more after the Great Recession, the frequency of wage changes declined more steeply as well. Our data allows evaluating the prevalence of DNWR in diverse economic circumstances. Like earlier research on this topic, we find that DNWR tends to be strongly prevalent, even in periods of slow economic growth and low wage inflation. DNWR declines during severe recessions but even then wage setting does not become completely flexible as the proportion of observed wage cuts is still below the level that would correspond to a flexible regime. JEL Classification: B41, D22

Downward Nominal Wage Rigidity in the United States: New Evidence From Worker-Firm Linked Data

This paper examines the extent and consequences of Downward Nominal Wage Rigidity (DNWR) using administrative worker-firm linked data from the Longitudinal Employer Household Dynamics (LEHD) program for a large representative U.S. state. Prior to the Great Recession, only 7-8% of job stayers are paid the same nominal hourly wage rate as one year earlier - substantially less than previously found in survey-based data - and about 20% of job stayers experience a wage cut. During the Great Recession, the incidence of wage cuts increases to 30%, followed by a large rise in the proportion of wage freezes to 16% as the economy recovers. Total earnings of job stayers exhibit even fewer zero changes and a larger incidence of reductions than hourly wage rates, due to systematic variations in hours worked. The results are consistent with concurrent findings in the literature that reductions in base pay are exceedingly rare but that firms use different forms of non-base pay and variations in hours worked to flexibilize labor cost. We then exploit the worker-firm link of the LEHD and find that during the Great Recession, firms with indicators of DNWR reduced employment by about 1.2% more per year. This negative effect is driven by significantly lower hiring rates and persists into the recovery. Our results suggest that despite the relatively large incidence of wage cuts in the aggregate, DNWR has sizable allocative consequences.

Optimal Monetary Policy Rule in a Heterogeneous Agent Model With Nominal Rigidities

In this paper, I study the optimal inflation rate in a sticky price economy in which workers are heterogeneous in labor productivity and wage changes are subject to asymmetric adjustment costs. The model calibrated to U.S. micro wage data implies downward nominal wage rigidity (DNWR). The optimal inflation rate is substantially higher than stated in the literature in the presence of worker heterogeneity. A key to understanding the result is that DNWR causes an inefficient cross-sectional allocation of labor as well as inefficient aggregate dynamics, enlarging the grease of the wheels effect of inflation.

A Study of Downward Nominal Wage Rigidity in Korea

This paper examines downward nominal wage rigidity in Korea using aggregate and individual-level data. We find that the degree of downward nominal wage rigidity differs depending on the data sources used. Results from the aggregate data indicate that, on average, wages have been flexible. By contrast, evidence from the micro data suggests that nominal wages are downwardly rigid most of the time. We also find that downward nominal wage rigidity can differ across industries at both industry and individual levels. At the individual level, wage rigidity is greater in the service than in the manufacturing sector, even though the latter exhibits smaller volatility in its rate of wage growth.Keywords: Downward nominal wage rigidity, UnemploymentJEL Classification: J30, J6(ProQuest: ... denotes formulae omitted.)I. IntroductionAfter the Global Financial Crisis in 2008, many countries experienced a sudden increase in unemployment as they suffered from economic recession. Even after several years of financial crisis, unemployment has not returned to its previous level; instead, high unemployment rates have persisted. This phenomenon is somewhat puzzling. One may expect a high unemployment rate to lead to lower wages (the price of labor). In such a situation, unemployment can be alleviated through wage cuts. In reality, however, this adjustment rarely happens. Schmitt-Grohe? and Uribe (2013) confirm that countries in the Eurozone have failed to adjust wages (measured as nominal hourly wages), which has resulted in widespread unemployment. The phenomenon by which the (nominal) wage is resistant to change is called the downward nominal wage rigidity (DNWR).1Downward nominal wage rigidity can be particularly costly in a low inflation environment, a situation that many countries have faced in recent years.2 For example, when inflation is high, firms can adjust their labor costs by paying relatively lower real wages without cutting nominal wages. They can offset increases in labor costs with high inflation, resulting in the real increases in labor cost to be well below the nominal figures. On the contrary, avoiding large labor costs in a low inflation environment is more difficult for firms because they cannot reduce their real labor costs without actual wage cuts. Therefore, the unemployment rate may rise because the only way for a firm to cut labor costs is through adjustments in employment. Thus, the existence of DNWR may be an important force to account for the high unemployment rate during low inflation. Examining the existence or degree of DNWR may provide some insights into how the labor market responds flexibly to a sudden (exogenous) negative shock or to changing economic conditions.A large volume of existing literature has examined micro data on the distribution of individual wage increases. In addition, many scholars have attempted to explain the sustained high unemployment rates in U.S. and Europe since the Great Recession by investigating the existence of nominal or real wage rigidity. Several studies suggest that nominal wage rigidity may have contributed to the persistence of high unemployment since the recent crisis. Similar studies have unveiled specific factors responsible for the high unemployment rates in Japan during its Lost Decade when concerns on deflation were high. Nevertheless, research on nominal wage rigidity in Korea has been scant. Thus, our paper attempts to provide certain evidence of nominal wage rigidity in Korea by using micro and macro data. In the past, the lack of proper individual wage data hindered researchers from examining this issue. However, household income panel data has become available since 1999, enabling us to document evidence based on existing literature and provide our own to support the existence of nominal wage rigidity in Korea.Related LiteratureSeveral strands of the literature have studied nominal wage rigidity; hence, before proceeding with our study, we present several strands closely linked to the concerns of this paper. …

Wage Rigidity, Inflation, and Institutions

AbstractWe 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.

Does downward nominal wage rigidity dampen wage increases?

Focusing on the compression of wage cuts, many empirical studies find a high degree of downward nominal wage rigidity (DNWR). However, the resulting macroeconomic effects seem to be surprisingly weak. This contradiction can be explained within an intertemporal framework in which DNWR not only prevents nominal wage cuts but also induces firms to compress wage increases. We analyze whether a compression of wage increases occurs when DNWR is binding by applying Unconditional Quantile Regression and Seemingly Unrelated Regression to a dataset comprising more than 169 million wage changes. We find evidence of a compression of wage increases and only very small effects of DNWR on average real wage growth. The results indicate that DNWR does not provide a strong argument against low inflation targets.

Some Efficiency Effects of Inflation Under Nominal Wage Rigidity

There is an extensive literature on the effects of downward nominal wage rigidity (DNWR) on employment, wage and macroeconomic outcomes going at least as far back as Keynes’ General Theory. This literature, however, focuses almost exclusively on ex post effects - namely, what are the employment and efficiency effects when the equilibrium wage falls but the actual wage paid does not or cannot fall to match it. This paper addresses the question in a “Lucas-critique-proof” way: given that employers know in advance they will not be able to cut wages in the future, how does this affect present wage-setting policy, and what are the effects of this foresight and of inflation on employment and efficiency? I find that downward nominal rigidity restrains wages in the presence of uncertainty but that inflation does not necessarily mitigate this effect. The impact of inflation on employment and efficiency may be either positive or negative, and there are few simple threshold-type rules to determine which it will be in any given situation. Instead, the efficiency effects of inflation depend on the precise characteristics of the market in question.

Optimal Monetary Policy and Downward Nominal Wage Rigidity in Frictional Labor Markets

This paper studies the optimal long-run inflation rate in a labor search and matching framework in the presence of downward nominal wage rigidity. Optimal monetary policy features positive inflation in the long run; the optimal annual long-run inflation rate for the U.S. economy is slightly below 1 percent with a money demand motive and around 2 percent otherwise. Positive inflation facilitates real wage adjustments and hence it eases job creation and prevents excessive increase in unemployment following adverse productivity shocks. The findings of the paper can also be related to standard Ramsey theory of “wedge smoothing”; with positive inflation under sticky prices, the size and the volatility of the intertemporal wedge are significantly reduced.

Does Downward Nominal Wage Rigidity Dampen Wage Increases?

Focusing on the compression of wage cuts, many empirical studies find a high degree of downward nominal wage rigidity (DNWR). However, the resulting macroeconomic effects seem to be surprisingly weak. This contradiction can be explained within an intertemporal framework in which DNWR not only prevents nominal wage cuts but also induces firms to compress wage increases. We analyze whether a compression of wage increases occurs when DNWR is binding by applying Unconditional Quantile Regression and Seemingly Unrelated Regression to a data set comprising more than 169 million wage changes. We find evidence for a compression of wage increases and only very small effects of DNWR on average real wage growth. The results indicate that DNWR does not provide a strong argument against low inflation targets.