Downward Nominal Wage Rigidity


John Beshears, James Choi, Brigitte Madrian, and David Laibson


The classical model of the labor market predicts that a worker’s wage will equal her marginal product. A growing body of empirical evidence challenges this prediction: firm-level administrative data reveal that employers often freeze their workers’ nominal wages but almost never cut their workers’ nominal wages even in the face of productivity shocks. This “downward nominal wage rigidity” does not extend to real wages in the U.S.; firms may cut their workers’ real wages by raising nominal wages by less than the rate of inflation. In this pilot we will measure the frequency of nominal wage cuts in a large sample of firms and measure the variation in downward nominal wage rigidity over the business cycle.