TY  - JOUR
AU  - Elsby,Michael W.
TI  - Evaluating the Economic Significance of Downward Nominal Wage Rigidity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12611
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12611
L1  - http://www.nber.org/papers/w12611.pdf
N1  - Author contact info:
Michael W. Elsby
University of Edinburgh
School of Economics
31 Buccleuch Place
Edinburgh
EH8 9JT
United Kingdom
Tel: 011 44 131 650 8361
Fax: 011 44 131 650 4514
E-Mail: Mike.Elsby@ed.ac.uk
M3  - presented at "SI 2006 Monetary Economics Workshop", July 10-14, 2006
AB  - This paper formalizes and assesses empirically the implications of widely observed evidence for downward nominal wage rigidity (DNWR).  It shows how a model of DNWR informed by diverse evidence for worker resistance to nominal wage cuts is nevertheless consistent with weak macroeconomic effects.  This occurs because firms have an incentive to compress wage increases as well as wage cuts when DNWR binds.  By neglecting potential compression of wage increases, the previous literature may have overstated the costs of DNWR to firms. Using a broad range of micro--data from the US and Great Britain I find that firms do indeed compress wage increases as well as wage cuts at times when DNWR binds.  Accounting for this reduces the estimated increase in aggregate wage growth due to DNWR to be much closer to zero, consistent with the predictions of the model.  These results suggest that DNWR may not provide a strong argument against the targeting of low inflation rates, as practiced by many monetary authorities.  Importantly, though, this result is nevertheless consistent with evidence that suggests workers are averse to nominal wage cuts.
ER  -