How Robust are Nominal Wage Rigidities?

Abstract

Several studies indicate that firms are reluctant to cut nominal wages during periods of relatively high nominal per capita GDP growth. It has been argued, however, that in an environment with a low nominal per capita GDP growth, i.e., when nominal wage cuts become customary, firms would no longer hesitate to cut nominal pay. To examine this argument we use data from Switzerland where nominal GDP growth has been very low between 1991 and 1997. It turns out that the rigidity of nominal wages is a robust phenomenon that does not vanish but even increases as inflation decreases. Nominal wage rigidity constitutes a considerable obstacle to real wage adjustments. Our estimates indicate that wage rigidity is almost complete for full-time workers who stay with the same employer, but we find little evidence of nominal rigidities for workers who switch employers. We also find evidence that, in the absence of downward nominal rigidity, real wages would indeed be quite responsive to unemployment.