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

Bauer, Thomas K.; Bonin, Holger; Sunde, Uwe

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

45 Pages Posted: 5 Apr 2004

See all articles by Thomas K. Bauer

Thomas K. Bauer

Rhine-Westphalia Institute for Economic Research (RWI-Essen); University of Bochum - Faculty of Economics; IZA Institute of Labor Economics

Holger Bonin

IZA Institute of Labor Economics; ZEW – Leibniz Centre for European Economic Research

Uwe Sunde

Ludwig Maximilian University of Munich (LMU)

Date Written: February 2004

Abstract

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.

Keywords: Downward wage rigidity, real effects of inflation, collective bargaining, switching regime model, West Germany

JEL Classification: E52, J31, J51

Suggested Citation: Suggested Citation

Bauer, Thomas K. and Bonin, Holger and Sunde, Uwe, Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from German Microdata (February 2004). Available at SSRN: https://ssrn.com/abstract=515966