Robustness and Real Consequences of Nominal Wage Rigidity

45 Pages Posted: 6 Nov 2000

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Lorenz Goette

University of Lausanne; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: March 2003

Abstract

Recent studies found evidence for nominal wage rigidity during periods of relatively high nominal GDP growth. It has been argued, however, that in an environment with low nominal GDP growth, when nominal wage cuts become customary, workers' opposition to nominal cuts would erode and, hence, firms would no longer hesitate to reduce nominal pay. If this argument is valid nominal wage rigidity is largely irrelevant because in a high-growth environment there is little need to cut nominal pay while in a low-growth environment the necessary cuts would occur.

To examine this argument we use data from Switzerland where nominal GDP growth has been very low for many years in the 1990s. We find that the rigidity of nominal wages is a robust phenomenon that does not vanish in a low growth environment. In addition, it constitutes a considerable obstacle to real wage adjustments. In the absence of downward nominal rigidity, real wages would indeed be quite responsive to unemployment. Moreover, the wage sweep-ups caused by nominal rigidity are strongly correlated with unemployment suggesting that downward rigidity of nominal wages indeed contributes to unemployment.

JEL Classification: E24, E31, E32

Suggested Citation

Fehr, Ernst and Goette, Lorenz F., Robustness and Real Consequences of Nominal Wage Rigidity (March 2003). Available at SSRN: https://ssrn.com/abstract=230738 or http://dx.doi.org/10.2139/ssrn.230738

Ernst Fehr (Contact Author)

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Lorenz F. Goette

University of Lausanne ( email )

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Centre for Economic Policy Research (CEPR)

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