Can Competitive Forces Reinforce Nominal Wage Rigidities?

Abstract

While rigidities in nominal factor costs imply a finite slope in the aggregate supply curve, this paper asks, “Do rigidities increase if there is a more competitive economy?” Several authors claim that real rigidities of monopoly power reinforce nominal rigidities due to price adjustment costs. This paper argues almost the opposite: that “real rigidities” due to competition (i.e., lack of monopoly power) reinforce nominal rigidities when firms are reluctant to raise prices due to competitive pressure. In the model, nominal factor costs are stickier than output prices. Thus risk-averse firms are slower to raise output prices than to lower them.

Keywords: Price Stickiness, Competitive Forces

JEL Classification: E12