Aggregate Wage Rigidity in the United States Brown Bag Seminar

Speaker: Mario Lupoli, University of St Andrews

Abstract: We propose a new measure of aggregate wage rigidity, the Nash wage elasticity (NWE). The NWE represents the percentage change in the actual wage rate when the wage that would occur under Nash bargaining changes by 1%. Using a range of different measures of the cost of labor, we estimate values for the NWE in US data that range from 0 to 0.9. These estimates indicate (a) a high degree of aggregate wage rigidity and (b) that the Nash bargaining provides a poor description of US wage setting. We show that NWE plays an important role in business cycles. A simple SAM model suggests that, if workers are paid Nash-bargained wages rather than actual wages, then the cyclical volatility of unemployment would decrease to less than 3% of what it is in the data.