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Synchronization in wage setting and the effects of monetary policy

By Giovanni Olivei and Silvana Tenreyro

Abstract

Systematic differences in the timing of wage setting decisions among industrialized countries provide an ideal framework to study the importance of wage rigidity in the transmission of monetary policy. The Japanese Shunto, for example, presents a clear case of bunching in wage setting decisions: From February to May, most firms set wages that remain in place until the following year; wage rigidity, thus, is relatively higher immediately after the Shunto. In contrast, wage agreements in Germany are well-spread within the calendar year, implying a relatively uniform degree of rigidity. We exploit the variation in timing of wage agreements within the year in Japan vis-à-vis the three largest European countries (Germany, the UK, and France) to investigate the effects of monetary policy under different degrees of effective wage rigidity. Our findings lend support to the long-held, though scarcely tested, view that wage-rigidity plays a key role in the transmission of monetary policy

Topics: HB Economic Theory, HD Industries. Land use. Labor
Publisher: Giovanni Olivei and Silvana Tenreyro
Year: 2007
OAI identifier: oai:eprints.lse.ac.uk:4990
Provided by: LSE Research Online
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