Working Paper: NBER ID: w20770
Authors: Supreet Kaur
Abstract: This paper tests for downward nominal wage rigidity by examining transitory shifts in labor demand, generated by rainfall shocks, in 600 Indian districts from 1956-2009. Nominal wages rise in response to positive shocks but do not fall during droughts. In addition, transitory positive shocks generate ratcheting: after they have dissipated, nominal wages do not adjust back down. This ratcheting effect generates a 9% reduction in employment levels. Inflation enables downward real wage adjustments both during droughts and after positive shocks. Survey evidence suggests that workers and employers believe that nominal wage cuts are unfair and lead to effort reductions.
Keywords: nominal wage rigidity; labor markets; rainfall shocks; employment
JEL Codes: E24; J31; O10; O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rainfall shocks (Q54) | nominal wage increases (J31) |
| rainfall shocks (Q54) | employment levels (J23) |
| nominal wage increases (J31) | employment levels (J23) |
| positive rainfall shocks (Q54) | wage rigidity (J31) |
| inflation (E31) | real wage adjustments (J31) |
| positive rainfall shocks (Q54) | total agricultural employment (J43) |