Wage Rigidity and Disinflation in Emerging Countries

42 Pages Posted: 20 Jun 2011

See all articles by Julian Messina

Julian Messina

World Bank

Anna Sanz-de-Galdeano

Universitat Autònoma de Barcelona; IZA Institute of Labor Economics

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Abstract

This paper examines the consequences of rapid disinflation for downward wage rigidities in two emerging countries, Brazil and Uruguay, relying on high quality matched employer-employee administrative data. Downward nominal wage rigidities are more important in Uruguay, while wage indexation is dominant in Brazil. Two regime changes are observed during the sample period, 1995-2004: (i) in Uruguay wage indexation declines, while workers' resistance to nominal wage cuts becomes more pronounced; and (ii) in Brazil, the introduction of inflation targeting by the Central Bank in 1999 shifts the focal point of wage negotiations from changes in the minimum wage to expected inflation. These regime changes cast doubts on the notion that wage rigidity is structural in the sense of Lucas (1976).

Keywords: downward wage rigidity, indexation, matched employer-employee data, emerging economies

JEL Classification: J30, E24

Suggested Citation

Messina, Julián and Sanz De Galdeano, Anna, Wage Rigidity and Disinflation in Emerging Countries. IZA Discussion Paper No. 5778. Available at SSRN: https://ssrn.com/abstract=1867047

Julián Messina (Contact Author)

World Bank ( email )

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Anna Sanz De Galdeano

Universitat Autònoma de Barcelona ( email )

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Barcelona, 08193
Spain

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
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