Nominal Wage Rigidity and Real Wage Cyclicality

17 Pages Posted: 24 Sep 1998

See all articles by Marcello M. Estevão

Marcello M. Estevão

International Monetary Fund (IMF) - Western Hemisphere Department

Beth Anne Wilson

Board of Governors of the Federal Reserve System

Date Written: April 29, 1998

Abstract

We discuss the ability of standard estimates of the correlation of wages and employment to measure the relative strength of aggregate demand and supply shocks, given that the choice of time period, deflator, and explanatory variables inherently biases the estimated cyclical coefficients toward identifying labor supply or demand. We determine that a closer look at the standard wage/labor correlation shows that it can neither provide information on the relative strength of supply and demand shocks, nor give an indication of the response of wages to aggregate demand shocks. Following this, we test the predictions of a neo-Keynesian model for the correlation of employment and wages using restrictions generated by the model to identify movements along or shifts in labor demand. Our results are consistent with the theory of nominal wage rigidity and we find no reason to reject the neo-Keynesian model based on the correlation of wages and employment.

JEL Classification: E24, J30

Suggested Citation

Estevao, Marcello M. and Wilson, Beth Anne, Nominal Wage Rigidity and Real Wage Cyclicality (April 29, 1998). Available at SSRN: https://ssrn.com/abstract=96621 or http://dx.doi.org/10.2139/ssrn.96621

Marcello M. Estevao (Contact Author)

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th St., NW
HQ1-10-115
Washington, DC 20431
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202-623-6038 (Phone)
202-589-6038 (Fax)

Beth Anne Wilson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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