wage rigidity


One of the basic tenets of Keynesian economics is that labor market institutions cause
downward nominal wage rigidity. We attempt to evaluate the evidence that relative wage
adjustments occur more quickly in higher-inflation environments. Using matched individual wage
data from consecutive years, we find that about 6-10 percent of workers experience wage rigidity
in a 10-percent inflation environment, while this proportion rises to over 15 percent when inflation
is less than 5 percent. By invoking a simple symmetry assumption, we generate counterfactual
distributions of wage changes from the distributions of actual wage changes. Using these
counterfactual distributions, we estimate that, over the sample period, a 1 percent increase in the
inflation rate reduces the fraction of workers affected by downward nominal rigidities by about
0.5 percent, and slows the rate of real wage growth by about 0.06 percent. Using state-level data,
the analysis of the effects of nominal rigidities is less conclusive. We find only a weak statistical
relationship between the rate of inflation and the pace of relative wage adjustments across local
labor markets.

Year of Publication
Date Published
Publication Language
Citation Key
In Christina D. Romer and David H. Romer (eds.), Reducing Inflation: Motivation and Strategy, University of Chicago Press, 1997
Hyslop, D., & Card, D. (1995). Does Inflation ’Grease the Wheels of the Labor Market’?. Retrieved from http://arks.princeton.edu/ark:/88435/dsp011j92g745w (Original work published December 1995)
Working Papers

Observations and Conjectures on the U.S. Employment Miracle
This paper has three goals. First, to place U.S. job growth in international perspective
by exploring cross-country differences in employment and population growth. This section finds
that the U.S has managed to absorb added workers -- especially female workers -- into
employment at a greater rate than most countries. The leading explanation for this phenomenon
is that the U.S. labor market has flexible wages and employment practices, whereas European
labor markets are rigid. The second goal of the paper is to evaluate the labor market rigidities
hypothesis. Although greater wage flexibility probably contributes to the U.S.'s comparative
success in creating jobs for its population, the slow growth in employment in many European
countries appears too uniform across skill groups to result from relative wage inflexibility alone.
Furthermore, a great deal of labor market adjustment seems to take place at a constant real wage
in the U.S. This leads to the third goal: To speculate on other explanations why the U.S. has
managed to successfully absorb so many new entrants to the labor market. We conjecture that
product market constraints contribute to the slow growth of employment in many countries.

Year of Publication
Date Published
Publication Language
Citation Key
Pischke, J.-S., & Krueger, A. (1997). Observations and Conjectures on the U.S. Employment Miracle. Retrieved from http://arks.princeton.edu/ark:/88435/dsp01d217qp51c (Original work published August 1997)
Working Papers