Evaluating the Economic Significance of Downward Nominal Wage Rigidity

Michael W. Elsby

NBER Working Paper No. 12611
Issued in October 2006
NBER Program(s):The Labor Studies Program, The Monetary Economics Program, The Economic Fluctuations and Growth Program

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.

download in pdf format
   (1160 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12611

Published: Elsby, Michael W.L., 2009. "Evaluating the economic significance of downward nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 154-169, March. citation courtesy of

Users who downloaded this paper also downloaded* these:
Card and Hyslop Does Inflation "Grease the Wheels of the Labor Market"?
Altonji and Devereux w7236 The Extent and Consequences of Downward Nominal Wage Rigidity
Barattieri, Basu, and Gottschalk w16130 Some Evidence on the Importance of Sticky Wages
Stiglitz w1442 Theories of Wage Rigidity
Kling, Mullainathan, Shafir, Vermeulen, and Wrobel w17410 Comparison Friction: Experimental Evidence from Medicare Drug Plans
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us