Working Paper: NBER ID: w25393
Authors: Michael W. Elsby; Gary Solon
Abstract: For more than 80 years, many macroeconomic analyses have been premised on the assumption that workers’ nominal wage rates cannot be cut. Contrary evidence from household surveys reasonably has been discounted on the ground that the measurement of frequent wage cuts might be an artifact of reporting error. This article summarizes a more recent wave of studies based on more accurate wage data from payroll records and pay slips. By and large, these studies indicate that, except in extreme circumstances (when nominal wage cuts are either legally prohibited or rendered beside the point by very high inflation), nominal wage cuts from one year to the next appear quite common, typically affecting 15-25 percent of job stayers in periods of low inflation.
Keywords: nominal wages; downward rigidity; payroll records; wage cuts
JEL Codes: E24; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low inflation (E31) | nominal wage cuts (J38) |
| nominal wage cuts (J38) | wage flexibility (J31) |
| nominal wage cuts (J38) | challenge to wage rigidity (J38) |
| nominal wage freezes (E64) | downward flexibility in nominal wages (J31) |