International Finance Discussion Papers (IFDP)
June 1995
Evidence of Nominal Wage Rigidity From a Panel of U.S. Manufacturing Industries
Vivek Ghosal and Prakash Loungani
Abstract:
Using annual data for 450 manufacturing industries over the period 1958 to 1989, we establish the following stylized facts on the response of industry nominal wage growth to aggregate and industry influences:
1. We find support for the canonical wage contracts model outlined in Blanchard and Fischer (1989). The elasticity of response of nominal wage growth to expected inflation is 0.7. The dasticity of nominal wage growth with respect to changes in unexpected inflation is 0.1.
2. These elasticity estimates are robust to splitting the sample along various dimensions: level of unionization, durability of the product, and industry contract length. The elasticity of nominal wage growth to expected inflation ranges from 0.6 to 0.8; the elasticity with respect to unexpected inflation is between 0.1 and 0.2.
3. We find support for the multi-sector wage indexation models of Duca and VanHoose (199] ) and others. The profit-sharing elasticity (the response of industry wage growth to industry profit growth) is positive, as hypothesized in these models. The instrumental variable estimates of the profit-sharing elasticity range from 0.1 to 0.3.
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