Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index

38 Pages Posted: 13 Dec 1999

See all articles by David E. Lebow

David E. Lebow

U.S. Federal Reserve Board - Macroeconomic Analysis Section

Raven E. Saks

U.S. Federal Reserve - Division of Research and Statistics

Beth Anne Wilson

Government of the United States of America - Division of International Finance (IFDP)

Date Written: July 12, 1999

Abstract

We examine the extent of downward nominal wage rigidity using the microdata underlying the BLS employment cost index--an extensive, establishment-based dataset with detailed information on wage and benefit costs. We find stronger evidence of downward nominal wage rigidity than did previous studies using panel data on individuals. Firms appear able to circumvent part, but not all, of this rigidity by varying benefits: Total compensation displays modestly less rigidity than do wages alone. Given our estimated amount of rigidity, a simple model predicts that the disinflation over the 1980s would have raised equilibrium unemployment notably. This prediction stands in contrast to the actual behavior of unemployment over this period: The addition of a term capturing the cost of rigidity (that rises as inflation falls) has no additional explanatory power in a standard Phillips Curve equation.

JEL Classification: E24, E31

Suggested Citation

Lebow, David E. and Saks, Raven E. and Wilson, Beth Anne, Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index (July 12, 1999). FEDS Working Paper No. 99-31. Available at SSRN: https://ssrn.com/abstract=187388 or http://dx.doi.org/10.2139/ssrn.187388

David E. Lebow

U.S. Federal Reserve Board - Macroeconomic Analysis Section ( email )

20th & C. St., N.W.
Mailstop 80
Washington, DC 20551
United States
202-452-3057 (Phone)
202-452-3819 (Fax)

Raven E. Saks

U.S. Federal Reserve - Division of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Beth Anne Wilson (Contact Author)

Government of the United States of America - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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