Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index

Posted: 2 Jul 2021

See all articles by David E. Lebow

David E. Lebow

Board of Governors of the Federal Reserve System

Raven E. Saks

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

Beth Anne Wilson

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

Suggested Citation

Lebow, David E. and Saks, Raven E. and Wilson, Beth Anne, Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index (1999). FEDS Working Paper No. 1999-31, Available at SSRN: https://ssrn.com/abstract=3877784

David E. Lebow (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Raven E. Saks

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

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Beth Anne Wilson

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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