DP4271 Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Microdata

Author(s): Thomas Bauer, Holger Bonin, Uwe Sunde
Publication Date: February 2004
Keyword(s): collective bargaining, downward wage rigidity, real effects of inflation, switching regime model, west germany
JEL(s): E52, J31, J51
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4271

The Paper examines real and nominal wage rigidities. We estimate a switching regime model, in which the observed distribution of individual wage changes, computed from West German register data for 1976-97, is generated by simultaneous processes of real, nominal or no wage rigidity, and measurement error. The fraction of workers facing wage increases that are due to nominal, but mostly real, wage rigidity is substantial. The extent of real rigidity rises with inflation, whereas the opposite holds for nominal rigidity. Overall, the incidence of wage rigidity, which accelerates unemployment growth, is most likely minimized in an environment with moderate inflation.