Kiel Working Papers, Kiel Institute for World Economics
No 1343:
The Robustness and Real Consequences of Nominal Wage Rigidity
Ernst Fehr and Lorenz Goette
Abstract: Recent studies found evidence for nominal wage rigidity
during periods of relatively high nominal GDP growth. It has been argued,
however, that in an environment with low nominal GDP growth, when nominal
wage cuts become customary, workers’ opposition to nominal cuts would erode
and, hence, firms would no longer hesitate to reduce nominal pay. If this
argument is valid nominal wage rigidity is largely irrelevant because in a
high-growth environment there is little need to cut nominal pay while in a
low-growth environment the necessary cuts would occur. To examine this
argument we use data from Switzerland where nominal GDP growth has been
very low for many years in the 1990s. We find that the rigidity of nominal
wages is a robust phenomenon that does not vanish in a low growth
environment. In addition, it constitutes a considerable obstacle to real
wage adjustments. In the absence of downward nominal rigidity, real wages
would indeed be quite responsive to unemployment. Moreover, the wage
sweep-ups caused by nominal rigidity are strongly correlated with
unemployment suggesting that downward rigidity of nominal wages indeed
contributes to unemployment.
43 pages, June 2007
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Downloadable files:
kap1343.pdf 
Download Statistics
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design Joakim Ekebom
