Nominal Wage Rigidity in Village Labor Markets
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.
I am deeply grateful to Lawrence Katz, Michael Kremer, Sendhil Mullainathan, and Rohini Pande for feedback and encouragement. For helpful discussions, I thank Melissa Adelman, George Akerlof, Emily Breza, Lorenzo Casaburi, Katie Coffman, Tom Cunningham, Francois Gerard, Edward Glaeser, Clement Imbert, Seema Jayachandran, Asim Khwaja, David Laibson, W. Bentley MacLeod, Lauren Merrill, Emi Nakamura, Miikka Rokkanen, Frank Schilbach, Heather Schofield, Jon Steinsson, Dmitry Taubinsky, Laura Trucco, Eric Verhoogen, and numerous seminar and conference participants. I thank Prasanta Nayak for outstanding field assistance and Lakshmi Iyer for sharing the World Bank data. This project received financial support from the Project on Justice, Welfare, and Economics at Harvard University and the Giorgio Ruffolo Doctoral Fellowship in Sustainability Science at Harvard University. All errors are my own. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Supreet Kaur, 2019. "Nominal Wage Rigidity in Village Labor Markets," American Economic Review, vol 109(9), pages 3585-3616.