If downward nominal wage rigidity exists, it should affect the distribution of earnings changes. We present a common analytical framework for three distinct and previously unconnected approaches to the analysis of downward nominal rigidity, the skewness-location approach, the symmetry approach and the histogram-location approach. We modify them by dropping the assumption of time-invariant rigidity and apply them to earnings data from the IAB-Beschftigtenstichprobe (IABS). We find that the distribution of West German log earnings changes is indeed affected by downward nominal rigidity. Our modification of the approaches also allows us to find that the degree of nominal rigidity depends on business cycle conditions, with weaker rigidity in times of rising unemployment. Our findings support the critics of very low inflation targets. Copyright Verein fü Socialpolitik and Blackwell Publishers Ltd 2001.

This paper substantially extends the limited available evidence on existence and extent of downward nominal wage rigidity in the European Union and the Euro Area. For this purpose we develop an econometric multi-country model based on Kahn's (1997) histogram-location approach and apply it to employee micro data from the European Community Household Panel (ECHP) for twelve of the EU's current member states. Our estimates for the degree of downward nominal wage rigidity on the national as well as the EU-wide level point to marked downward nominal wage rigidity within the European Union.

Many recent attempts to find evidence on downward nominal wage rigidity in micro data have suffered from problems such as composition bias and the effects of measurement error. In this paper, a model of proportional downward nominal wage rigidity is developed which avoids these problems by taking into account the determinants of wage changes and the measurement process that leads to observable earnings changes. We find a high degree of downward nominal wage rigidity in German micro data. Its real implications for individual expected wage growth, the aggregate wage level and equilibrium unemployment have marked effects for rates of inflation lower than 3 percent.

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent, nonprofit limited liability company (Gesellschaft mit beschränkter Haftung) supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. The current research program deals with (1) mobility and flexibility of labor, (2) internationalization of labor markets, (3) welfare state and labor market, (4) labor markets in transition countries, (5) the future of labor, (6) evaluation of labor market policies and projects and (7) Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S Are Nominal Wages Rigid? Recent Evidence and Policy ImplicationsIn the presence of downwardly rigid nominal wages, low inflation may lead to higher equilibrium unemployment by hindering real wage adjustments. This paper surveys and analyses the growing evidence on downwardly rigid nominal wages. We deal not only with assessments of existence and extent of downward nominal wage rigidity, but also discuss its possible explanations and macroeconomic consequences. We conclude that downward nominal wage rigidity does exist, that its extent is substantial and that very likely the real consequences at low, close-to-zero inflation are non-negligible. The results of this strand of research should therefore be taken into account in the formulation of optimal inflation targets. JEL Classification:J30, E24, E31, E52