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This paper examines the consequences of rapid disinflation for downward wage rigidities in two emerging countries, Brazil and Uruguay, relying on high quality matched employer-employee administrative data. Downward nominal wage rigidities are more important in Uruguay, while wage indexation is dominant in Brazil. Two regime changes are observed during the sample period, 1995-2004: (i) in Uruguay wage indexation declines, while workers' resistance to nominal wage cuts becomes more pronounced; and (ii) in Brazil, the introduction of inflation targeting by the Central Bank in 1999 shifts the focal point of wage negotiations from changes in the minimum wage to expected inflation. These regime changes cast doubts on the notion that wage rigidity is structural in the sense of Lucas (1976).

Downward wage rigidity --- Economic Theory & Research --- Emerging economies --- Environmental Economics & Policies --- Finance and Financial Sector Development --- Income --- Indexation --- Labor Markets --- Labor Policies --- Matched employer-employee data --- Social Protections and Labor

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A vector autoregression model with time-varying coefficients is used to examine the evolution of wage cyclicality in four Latin American economies: Brazil, Chile, Colombia and Mexico, during the period 1980-2010. Wages are highly pro-cyclical in all countries up to the mid-1990s except in Chile. Wage cyclicality declines thereafter, especially in Brazil and Colombia. This decline in wage cyclicality is in accordance with declining real-wage flexibility in a low-inflation environment. Controlling for compositional effects caused by changes in labor force participation along the business cycle does not alter these results.

Bayesian Estimation --- Downward Wage Rigidity --- Economic Theory & Research --- Environment --- Environmental Economics & Policies --- Governance --- Indexation --- Labor Markets --- Labor Policies --- Macroeconomics and Economic Growth --- Real Wage Cyclicality --- Social Protections and Labor --- Time Varying Coefficients --- Vector Autoregression --- Youth & Governance

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Wage setters take into account the future consequences of their current wage choices in the presence of downward nominal wage rigidities. Several interesting implications arise. First, a closed-form solution for a long-run Phillips curve relates average unemployment to average wage inflation; the curve is virtually vertical for high inflation rates but becomes flatter as inflation declines. Second, macroeconomic volatility shifts the Phillips curve outward, implying that stabilization policies can play an important role in shaping the trade-off. Third, nominal wages tend to be endogenously rigid also upward, at low inflation. Fourth, when inflation decreases, volatility of unemployment increases whereas the volatility of inflation decreases: this implies a long-run trade-off also between the volatility of unemployment and that of wage inflation.

Inflation (Finance). --- Inflation. --- Unemployment -- Effect of inflation on. --- Unemployment --- Inflation (Finance) --- Effect of inflation on. --- Inflation (Finance) and unemployment --- Stagflation --- Finance --- Natural rate of unemployment --- Stagnation (Economics) --- Inflation --- Labor --- Price Level --- Deflation --- Wages, Compensation, and Labor Costs: General --- Unemployment: Models, Duration, Incidence, and Job Search --- Wage Level and Structure --- Wage Differentials --- Labour --- income economics --- Macroeconomics --- Wages --- Wage rigidity --- Unemployment rate --- Prices --- United States

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We propose a theory of low-frequency movements in unemployment based on asymmetric real wage rigidities. The theory generates two main predictions: long-run unemployment increases with (i) a fall in long-run productivity growth and (ii) a rise in the variance of productivity growth. Evidence based on U.S. time series and on an international panel strongly supports these predictions. The empirical specifications featuring the variance of productivity growth can account for two U.S. episodes which a linear model based only on long-run productivity growth cannot fully explain. These are the decline in long-run unemployment over the 1980s and its rise during the late 2000s.

Labor --- Production and Operations Management --- Macroeconomics: Production --- Unemployment: Models, Duration, Incidence, and Job Search --- Wages, Compensation, and Labor Costs: General --- Wage Level and Structure --- Wage Differentials --- Labour --- income economics --- Macroeconomics --- Productivity --- Unemployment --- Real wages --- Unemployment rate --- Wage rigidity --- Industrial productivity --- Wages --- United States --- Unemployment. --- Industrial productivity. --- Macroeconomics.

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It has been well established that the wages of individual workers react little, especially downwards, to shocks that hit their employer. This paper presents new evidence from a unique survey of firms across Europe on the prevalence of downward wage rigidity in both real and nominal terms. The authors analyse which firm-level and institutional factors are associated with wage rigidity. The results indicate that it is related to workforce composition at the establishment level in a manner that is consistent with related theoretical models (e.g. efficiency wage theory, insider-outsider theory). The analysis also finds that wage rigidity depends on the labour market institutional environment. Collective bargaining coverage is positively related with downward real wage rigidity, measured on the basis of wage indexation. Downward nominal wage rigidity is positively associated with the extent of permanent contracts and this effect is stronger in countries with stricter employment protection regulations.

Bargaining power --- Central banks --- Collective bargaining --- Efficiency wage theory --- Employment --- Environment --- Environmental Economics & Policies --- Income --- Labor Markets --- Labor markets --- Labor Policies --- Labour --- Labour markets --- Macroeconomics and Economic Growth --- Markets and Market Access --- Nominal wages --- Real income --- Real wages --- Rents --- Rigid wages --- Skilled workers --- Social Protections and Labor --- Unemployment --- Wage flexibility --- Wage increases --- Wage rigidities --- Wage rigidity --- Wages