Downward Nominal Wage Rigidity in the United States During and After the Great Recession

47 Pages Posted: 8 Feb 2016

See all articles by Bruce Fallick

Bruce Fallick

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Michael Lettau

Bureau of Labor Statistics

William Wascher

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: 2016-01-29

Abstract

Rigidity in wages has long been thought to impede the functioning of labor markets. One recent strand of the research on wage flexibility in the United States and elsewhere has focused on the possibility of downward nominal wage rigidity and what implications such rigidity might have for the macroeconomy at low levels of inflation. The Great Recession of 2008-09, during which the unemployment rate topped 10 percent and price deflation was at times seen as a distinct possibility, along with the subsequent slow recovery and persistently low inflation, has added to the relevance of this line of inquiry. In this paper, we use establishment-level data from a nationally representative establishment-based compensation survey collected by the Bureau of Labor Statistics to investigate the extent to which downward nominal wage rigidity is present in U.S. labor markets. We use several distinct methods proposed in the literature to test for downward nominal wage rigidity, and to assess whether such rigidity is more severe at low rates of inflation and in the presence of negative economic shocks than in more normal economic times. Like earlier studies, we find evidence of a significant amount of downward nominal wage rigidity in the United States. We find no evidence that the high degree of labor market distress during the Great Recession reduced the amount of downward nominal wage rigidity and some evidence that operative rigidity may have increased during that period.

Suggested Citation

Fallick, Bruce and Lettau, Michael and Wascher, William, Downward Nominal Wage Rigidity in the United States During and After the Great Recession (2016-01-29). FEDS Working Paper No. 2016-1, Available at SSRN: https://ssrn.com/abstract=2725019 or http://dx.doi.org/10.17016/FEDS.2016.001

Bruce Fallick (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

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Michael Lettau

Bureau of Labor Statistics

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William Wascher

Board of Governors of the Federal Reserve System ( email )

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