Evaluating the economic significance of downward nominal wage rigidity
By: Michael W.L. Elsby.
Contributors: London School of Economics and Political Science. Centre for Economic Performance.
Series: CEP discussion paper ;; no. 704; Discussion paper (London School of Economics and Political Science. Centre for Economic Performance : Online) ;; no. 704.
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2005
Place of publication: London
Language: eng
Format: Electronic resource
Description: "This paper seeks to contribute to the literature on downward nominal wage rigidity (DNWR) along two dimensions. First, we formulate and solve an explicit model of wage-setting in the presence of worker resistance to nominal wage cuts - something that has previously been considered intractable. In particular, we show that this resistance renders wage increases (partially) irreversible. Second, using this model, we can explain why previous estimates of the macroeconomic effects of DNWR have been so weak despite remarkably robust microeconomic evidence. In particular, we show that previous studies have neglected the possibility  that DNWR can lead to a compression of wage increases as well as decreases. Thus, the literature may have been overstating the costs of DNWR to firms. Using micro-data for the US and Great Britain, we find robust evidence in support of the predictions of the model. In the light of this evidence, we conclude that increased wage pressure due to DNWR may not be as large as previously envisaged, but that the data is nevertheless consistent with a model in which workers resist nominal wage cuts."
Notes: Includes bibliographical references.
Title from PDF file (viewed on Sept. 6, 2005).
"August 2005."
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.