Inflation, Nominal Wage Rigidity, and the Efficiency of Labor Markets

Posted: 25 Jun 1998

See all articles by David E. Lebow

David E. Lebow

U.S. Federal Reserve Board - Macroeconomic Analysis Section

David J. Stockton

Government of the United States of America - Division of Research and Statistics

William Wascher

Board of Governors of the Federal Reserve System - Division of Research and Statistics

Date Written: October 1995

Abstract

If nominal wages cannot fall, then positive inflation may facilitate real wage adjustment. We examine data on individuals' wage changes and find only limited evidence of such downward nominal rigidity. The shape of the distribution of wage changes is little affected by the rate of inflation. About 8 percent of job stayers have zero nominal wage change, but we estimate that less than half of that spike represents truncation associated with downward nominal rigidity. We estimate that reducing inflation from four percent to zero would result in an additional 1/2 to 1 3/4 percent of peoplehaving constrained wages because of downward nominal rigidity, and our estimates of the associated welfare loss center on about five-hundredths of a percent of aggregate output.

JEL Classification: E31, J30

Suggested Citation

Lebow, David E. and Stockton, David J. and Wascher, William, Inflation, Nominal Wage Rigidity, and the Efficiency of Labor Markets (October 1995). FEDS Working Paper 95-45. Available at SSRN: https://ssrn.com/abstract=3032

David E. Lebow (Contact Author)

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)

David J. Stockton

Government of the United States of America - Division of Research and Statistics

20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States

William Wascher

Board of Governors of the Federal Reserve System - Division of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2812 (Phone)
202-452-3819 (Fax)

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