The Incidence of Nominal and Real Wage Rigidities in Great Britain: 1978–98

Abstract

This article analyses the extent of rigidities in wage setting in Great Britain over the 1980s and 1990s. Our estimation strategy follows the generalised Altonji and Devereux (2000) model discussed in the introduction to this Feature, but it includes modifications to include some special features of the British data. Our estimates reveal that real rigidities in wage setting are more prevalent than nominal rigidities in Great Britain, although the incidence of these real wage rigidities has fallen gradually over time. If firms cannot cut real wages in response to negative demand shocks they may resort to laying off workers. Our results support this micro‐foundation of the wage–unemployment Phillips curve: workers who are more likely to be protected from wage cuts are also more likely to lose their jobs.

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