Friday, February 19, 2016

Extreme nominal wage rigidity

In one of Paul Krugman's presentations about macro [pdf], he presents a picture of nominal wage rigidity:


Is that 2012 figure for real? It's inconsistent with e.g. this result:


Also shown here [pdf]:



I would agree that is some serious nominal wage rigidity! However e.g. the US doesn't exhibit that magnitude of an effect, so it hardly seems like this would be a general conclusion.

6 comments:

  1. "However e.g. the US doesn't exhibit that magnitude of an effect, so it hardly seems like this would be a general conclusion."

    I can't speak for anyone else, but I'm pretty sure the reason that nominal wage rigidity isn't as pronounced in the US is twofold: 1) the US has a more efficient labor market than Portugal as and such it exhibits less frictions in nominal wage determination and 2) 'equilibrium' nominal wage growth has been higher in aggregate in the US than in Portugal, so a lower fraction of wages changes at zero should be observed than in Portugal.

    By 'equilibrium nominal wage,' I mean the growth rate real wages in equilibrium (TFP growth basically) plus inflation, so basically inflation has been higher in the US. Also, Portugal has even more of a problem than the rest of the Euro zone because of the exchange rate peg -- in order for internal devaluation to occur, there needs to be a bunch of lower-than-the-rest-of-Europe inflation, which pushes equilibrium wage growth further down.

    In short, you shouldn't observe large scale DNWR unless inflation is really low.

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    1. I would agree -- and you can sort of see the effect in the first two graphs from Blanchard. In the 80s, inflation was high and so was nominal wage growth ... leading to few people in the zero change histogram bin.

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  2. Besides which, Portugal is only part of the Eurozone, and has no monetary policy of its own. We also do not know how close Portuguese wages are to subsistence level. What do wage changes look like in Appalachia? In the Mississippi Delta?

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    1. Hi Bill,

      The lack of an independent monetary policy shouldn't have much of a direct bearing on the shape of the distribution of wage changes. It is generally taken to be the result of "efficiency" or lack thereof in labor force price setting. Portugal, for example, will take the negotiated result of a single labor union and apply it to the entire sector.

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    2. "Portugal, for example, will take the negotiated result of a single labor union and apply it to the entire sector."

      Well, there's your coordination. :)

      But as for the lack of independent monetary policies, don't we see the effect of that in the US? If New York and California, among other states, did not send money to Mississippi and Alabama via the federal government, wouldn't wages in those states be even lower than they are? And therefore more resistant to going lower? How low can you go?

      The EU does not have such monetary transfer mechanisms, which raises the specter of so-called internal devaluations. You don't think that internal devaluations meet resistance by workers?

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  3. O/T: ever hear of Mark Blyth? Any opinion on his views?

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