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Nominal Wage Rigidity in Village Labor Markets

Supreet Kaur

NBER Working Paper No. 20770
Issued in December 2014, Revised in November 2017
NBER Program(s):Development Economics, Economic Fluctuations and Growth, Labor Studies, Monetary Economics

This paper tests for downward nominal wage rigidity by examining transitory shifts in labor demand, generated by rainfall shocks, in 600 Indian districts from 1956-2009. Nominal wages rise in response to positive shocks but do not fall during droughts. In addition, transitory positive shocks generate ratcheting: after they have dissipated, nominal wages do not adjust back down. This ratcheting effect generates a 9% reduction in employment levels. Inflation enables downward real wage adjustments both during droughts and after positive shocks. Survey evidence suggests that workers and employers believe that nominal wage cuts are unfair and lead to effort reductions.

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Document Object Identifier (DOI): 10.3386/w20770

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