Nominal Wage Changes Research Articles

Potential Consequences of a Change in Money Wage Under Keynesian Macroeconomics Theory

This research paper has delved into wage dynamics and economic health. The author has chosen to juxtapose the Keynesian macroeconomics theory with that of the classical, aiming to critically examine the contrasting viewpoints of classical and Keynesian economic theories. The core of the analysis hinges on the Keynesian framework introduced by John Maynard Keynes, particularly with its stance on the implications of changes in nominal wage on the broader economy. Historical instances witnessing substantial wage fluctuations serve as real-world examples to substantiate the theoretical discussions, intending to uncover the causal factors and subsequent economic responses to these wage changes. To further bolster the inquiry, the study employs macroeconomic mathematical modelling to furnish quantitative insights that elucidate Keynesian assumptions on the labour market and its implications. By concentrating on the macroeconomic repercussions of nominal wage changes, as opposed to microeconomic consequences, this paper sheds light on the broader implications of wage adjustments in an economy, underpinned mainly by Keynesian perspectives.

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.

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

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.

Minimum Wage and the Working Poor in Nigeria: Is there a Link?

In the last two decades, the effectiveness of the minimum wage as a poverty-reducing tool has come under criticism. It has been observed that a weak link exists between poor workers and minimum wage. Similarly, in countries such as Nigeria, minimum wage determination is not indexed to price movements, thus nominal wage changes do not adjust for price changes. The consequence of this is that, the worth of minimum wage is rapidly eroded. Few studies exist on this topic in Nigeria, despite its relevance for policy guidance. This study therefore adds to the literature by examining the link between minimum wage and poverty status of its intended beneficiaries in Nigeria, using 2004 and 2009 household survey data. Findings show that, although the minimum wage is targeted at the poor-working group, the link is not strong. More importantly, the minimum wage policy in Nigeria has a marginal poverty-reducing effect. Plausible explanations for the marginal effect are the poor targeting of minimum wage workers and the rapidly declining value of nominal minimum wages overtime. Gradual and regular adjustments of the minimum wage to the consumer price index are recommended, as it will help preserve the worth of the wages.

An empirical study on the New Keynesian wage Phillips curve: Japan and the US

Abstract We compare aggregate wage dynamics in Japan and the US from 1970 to 2013 from the perspective of the New Keynesian wage Phillips curve (NKWPC), derived by [Galí, Jordi. 2011a. “The Return of the Wage Phillips Curve.” Journal of the European Economic Association 9 (3): 436–461.]. We consider time variations in NKWPC’s parameters and make comparisons with micro-based evidence. Our main findings are three-fold. First, although Japan’s NKWPC has flattened over time, the slope of the NKWPC is much steeper in Japan than in the US. This suggests that nominal wage changes are less frequent in the US than in Japan. Second, inflation indexation, more prevalent in Japan in earlier periods, has recently become more important in the US although its role has declined over time in both countries. Third, our macro-level empirical results on the NKWPC are generally in line with micro-based evidence in each country, which suggests that the NKWPC provides a reasonable platform for modeling aggregate wage dynamics.

Time-dependent or state-dependent wage-setting? Evidence from periods of macroeconomic instability

Administrative data on monthly wages in Iceland during 1998–2010 provide new insight into nominal wage rigidity. Unlike the data used in previous work, ours have a higher frequency, minimal measurement error, and a long sample including a period of substantial macroeconomic instability. We find that the monthly frequency of nominal wage changes is 13 percent. Although nominal wage cuts are rare, their frequency rises following a large macroeconomic shock. Timing of wage changes is both time-dependent and state-dependent: we find evidence of synchronization of adjustment and contracts of fixed duration, but also that inflation and unemployment over the wage spell affect the timing of adjustment.

Sticky Wages: Evidence from Quarterly Microeconomic Data

Using an original micro-dataset from France, we investigate nominal wage stickiness. Nominal wage changes are found to occur at a quarterly frequency of around 38 percent over our sample period, and to be to a large extent staggered across establishments, and very synchronized within establishments. We carry out an econometric analysis of wage changes based on a two-threshold sample selection model. Our results are that the timing of wage adjustments is time-dependent as opposed to state-dependent, there is evidence of predetermination in wage changes, and both backward and forward-looking behavior is relevant in wage setting. (JEL E24, E52, J31)

Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income

Where Did the Productivity Growth Go?Inflation Dynamics and the Distribution of Income Ian Dew-Becker and Robert J. Gordon It's no secret that the gap between the rich and the poor has been growing, but the extent to which the richest are leaving everybody else behind is not widely known. . . . It's like chasing a speedboat with a rowboat. —Bob Herbert, The New York Times1 There is no question that a huge gap has opened up between productivity and living standards. . . . Not since World War II have productivity and income diverged so sharply. —Louis Uchitelle, The New York Times2 The first half of this decade has witnessed a sharp contrast between strong output and productivity growth, on the one hand, and slow employment and median income growth, on the other. The strong growth in output combined with weak growth in hours worked has resulted in an explosion [End Page 67] in labor productivity growth, implying an underlying trend that is rising faster than in any previous subperiod of the postwar era. Yet who received the benefits? Median household income actually fell by 3.8 percent from 1999 to 2004 and grew from 1995 to 2004 at a rate of only 0.9 percent a year, a much slower rate than that of nonfarm private business (NFPB) output per hour over the same period, at 2.9 percent.3 Similarly, the median real wage for all workers grew over 1995-2003 at an average rate of 1.4 percent a year, less than half the rate of productivity growth.4 The failure of the productivity growth revival to boost the real incomes and wages of the median family and the median worker calls into question the standard economic paradigm that productivity growth translates automatically into rising living standards, as in this quote from Paul Krugman: Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker . . . the essential arithmetic says that long-term growth in living standards . . . depends almost entirely on productivity growth.5 This paper should be read in the spirit of a detective novel, whose title might be "The Case of the Missing Productivity Payoff." Our detective story is divided into two parts, macro and micro. The macro part begins with the standard identity stating that productivity growth equals real wage growth if labor's income share is constant. We examine the aggregate data that compare productivity growth with growth in alternative real wage measures, and we then ask how the post-1995 acceleration in productivity growth enters into the econometrics of price and wage dynamics. In past incarnations of dynamic Phillips curves, productivity growth has been a sideshow to the main story, if mentioned at all. The paper provides a new look at price and wage dynamics in order to assess the causes of low inflation in the decade after 1995. In light of the strong demand of the late [End Page 68] 1990s, why was inflation so low? What role did the revival of trend productivity growth play, in contrast to other beneficial supply shocks? Did the productivity growth slowdown of 1965-79 play a parallel role in creating high inflation in the 1970s? Can dynamic wage and price equations reproduce the behavior of the changes in labor's income share observed in the data? The investigation begins with the Gordon inflation model that explains price changes by inertia, demand shocks, and supply shocks but does not include wages. A unique contribution of this paper is then to bring wages back into the study of inflation dynamics and to develop a model that includes both price and wage equations and allows each to feed back to the other. This model can capture the effect of changes in trend productivity growth on inflation, nominal wage changes, and changes in labor's income share. In dynamic simulations of the wage-price model, we find that changes in the productivity growth trend had major effects in boosting inflation during 1965-79 and in slowing it down between 1995 and 2005...

Nominal wage rigidities in Mexico: evidence from social security records

This paper analyzes the existence and extent of downward nominal wage rigidities in the Mexican labor market using data from the administrative records of the Mexican Social Security Institute (IMSS). This establishment-level, panel dataset allows us to track workers employed with the same firm, observe their wage profiles and calculate the nominal-wage changes they experience over time. Based on the estimated density functions of nominal wage changes, we are able to calculate some standard tests of nominal wage rigidity that have been proposed in the literature. Furthermore, we extend these tests to take into account the presence of minimum wage laws that may affect the distribution of nominal wage changes. The densities and tests calculated using these data are similar to those obtained using administrative data from other countries, and constitute a significant improvement over the measures of nominal wage rigidities obtained from household survey data. We document the importance of minimum wages in the Mexican labor market, as evidenced by the large fraction of minimum wage earners and the indexation of wage changes to the minimum wage increases. We find considerably more nominal wage rigidity than previous estimates obtained for Mexico using data from the National Urban Employment Survey (ENEU) suggest, but lower than that reported for developed countries by other studies that use comparable data.

Are Nominal Wage Changes Skewed Away From Wage Cuts?

This article sheds light on an important question for macroeconomic policy and economic theory: Are nominal wage changes skewed away from wage cuts? In particular, does downward nominal rigidity censor some would be wage cuts, transforming some wage changes that would be negative into zero-wage changes? To answer this question, the author documents key properties of the distribution of wage changes in panel data. 

Wage indexation, turnover, and nominal-wage changes in Brazilian manufacturing, 1966–1976

This paper estimates the short-run impact of wage indexation on monthly nominal-wage changes in two Brazilian manufacturing industries between 1966 and 1976. A policy and market-force wage determination model is estimated. The model includes variables that capture the effects of the annual collective wage adjustment, the regional minimum wage, demand, and inflation. Monthly data allow identification of the month of impact of the indexation coefficients. Results suggest that indexation does not fully set wages and support the hypothesis that wages rise between formal adjustments in response to economic forces. Intra-period wage drift is possible because of turnover and recontracting in the labor market.

Why U.S. Wage and Employment Behaviour Differs From That in Britain and Japan

If a poll were to be conducted among American academic economists to select 'The Most Mystifying Economic Phenomenon of Our Time,' surely the sticky nominal wage rate would emerge at or near the top of the list. The slow and partial response of the nominal wage rate to changes in aggregate nominal spending has been a central postulate of macroeconomic theory for the past 45 years, from Keynes' General Theory, down to the standard postwar textbook Keynesian paradigm, to the more modern fixed-wage-price models of Robert Barro and Herschel Grossman (I976), and Edmond Malinvaud (I977). Unwilling passively to accept nominal wage rigidity as an unexplained assumption, many labour-market theorists have followed the lead of Costas Azariadis (I975) and Martin Baily (I974) in building models to explain rigid wages and layoff unemployment as the rational outcome of a profit-maximising calculus. As I pointed out in an early critique of the Azariadis-Baily model (I976a) their assumptions cannot explain cycles in employment, but rather why workers would want fixed incomes, i.e., a fixed wage rate and fixed employment. Soon thereafter, Barro (I977) went one step further and argued that contract theory is a 'facade' which cannot explain why workers would choose a rigid wage and variable employment in preference to the classical equilibrium quantity of employment that equates the marginal product of labour with the marginal value of time. Now an examination of the evidence has led me to the realisation that rigid wages cannot provide the underpinnings for a universally valid theory of the business cycle, simply because wages are not universally rigid. I document below with postwar quarterly data that the share of fluctuations in the manufacturing wage bill taking the form of nominal wage changes, as compared to changes in hours worked, is five to ten times greater in Britain and Japan than in