Erica Groshen and William Dickens (FRBNY and Brookings Institution)

International Wage Flexibility Project: special session

Past analysis of wage rigidity in Europe has been done with macro data on prices, wages and unemployment. The International Wage Flexibility Project (IWFP) is a collaborative project in which thirteen country teams and researchers at the European Central Bank will use micro data to study the nature, extent, causes, and consequences of wage rigidity.

Downward nominal rigidity in wages can cause significant unemployment when average nominal wage changes are small. Inflation can ameliorate this problem effectively “greasing the wheels” and allowing relative wage adjustment. However, inflation also causes price signals to lose their usefulness adding “sand” to the economic engine and making it less efficient. Groshen and Schweitzer have proposed a method for identifying the extent to which inflation has each of these effects. The IWFP will use this method to analyse the relative importance of each problem.

All country teams participating in the IWFP will conduct a core analysis which will replicate the Groshen-Schweitzer “sand and grease” analysis of wage rigidity. Also part of the core analysis will be a method-of-moments estimator for downward real and nominal rigidity developed for the project. In addition, each country team is conducting special analysis which take advantage of unique aspects of their data.

Session: 5a   Auditorium   Category: International Wage Flexibility Project Session

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