The Incidence of Nominal and Real Wage Rigidities in Great Britain: 1978-1998

40 Pages Posted: 31 Oct 2007

See all articles by Richard Barwell

Richard Barwell

Bank of England

Mark Schweitzer

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: September 2005

Abstract

This paper analyzes the extent of rigidities in wage setting in Great Britain over the 1980s and 1990s. Our estimation strategy, which generalizes the work of Altonji and Devereux (2000), models the notional wage growth distribution - the distribution of nominal wage growth that would occur in the absence of rigidities in pay - while allowing for the presence of measurement error in the data. The model then allows for the possibility that the nominal wage growth of a fraction of the workforce may be subject to a nominal or real downward rigidity. Our model suggests that real rigidities in wage setting are more prevalent than nominal rigidities, although the incidence of these real wage rigidities has fallen gradually over time. If firms cannot cut real wages in response to negative demand shocks they may resort to laying off workers. Our results support this microfoundation of the wage-unemployment Phillips curve: Workers who are more likely to be protected from wage cuts are also more likely to lose their jobs.

Suggested Citation

Barwell, Richard and Schweitzer, Mark, The Incidence of Nominal and Real Wage Rigidities in Great Britain: 1978-1998 (September 2005). FRB of Cleveland Working Paper No. 05-08, Available at SSRN: https://ssrn.com/abstract=1025518 or http://dx.doi.org/10.2139/ssrn.1025518

Richard Barwell

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mark Schweitzer (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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