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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index
David E. Lebow, Raven E. Saks, and Beth Anne Wilson

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.

Keywords: Nominal wage rigidity, benefits, inflation

Full paper (288 KB PDF) | Full paper (1062 KB Postscript)

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Last update: August 10, 1999