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Wage rigidity and disinflation in emerging countries

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  • Messina, Julian
  • Sanz-de-Galdeano, Anna
Abstract
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).

Suggested Citation

  • Messina, Julian & Sanz-de-Galdeano, Anna, 2011. "Wage rigidity and disinflation in emerging countries," Policy Research Working Paper Series 5863, The World Bank.
    • Handle: RePEc:wbk:wbrwps:5863
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    2. Luca Gambetti & Julián Messina, 2018. "Evolving Wage Cyclicality in Latin America," The World Bank Economic Review, World Bank, vol. 32(3), pages 709-726.
    3. Xie, Victoria Wenxin, 2024. "Labor market adjustment to extreme heat shocks: Evidence from Brazil," Journal of Economic Behavior & Organization, Elsevier, vol. 222(C), pages 266-283.
    4. Juli?n Messina & Anna Sanz-de-Galdeano, 2014. "Wage Rigidity and Disinflation in Emerging Countries," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 102-133, January.
    5. Laura Juarez & Daniel Casarin de la Cabada, 2018. "Downward Wage Rigidities in the Mexican Labor Market: 1996–2011," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2018), pages 129-180, November.
    6. Gomez Ospina, Monica A., 2023. "Optimal monetary policy in developing countries: The role of informality," Journal of Economic Dynamics and Control, Elsevier, vol. 155(C).
    7. Antonia López-Villavicencio & Sophie Saglio, 2017. "The Wage Inflation-Unemployment Curve at the Macroeconomic Level," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(1), pages 55-78, February.
    8. De Schryder, Selien & Peersman, Gert & Wauters, Joris, 2020. "Wage indexation and the monetary policy regime," Journal of Macroeconomics, Elsevier, vol. 63(C).
    9. Agudelo, Sonia A. & Sala, Hector, 2017. "Wage Rigidities in Colombia: Measurement, Causes, and Policy Implications," IZA Discussion Papers 10669, Institute of Labor Economics (IZA).
    10. Dias, Daniel A. & Marques, Carlos Robalo & Martins, Fernando, 2013. "Wage rigidity and employment adjustment at the firm level: Evidence from survey data," Labour Economics, Elsevier, vol. 23(C), pages 40-49.
    11. Carlos Robalo Marques & Fernando Martins & Daniel Dias, 2012. "Labour cost-cutting strategies microeconomic evidence from survey data," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    12. Anete Pajuste & Hernán Ruffo, 2017. "Wage rigidity and workers’ flows during recessions," SSE Riga/BICEPS Research Papers 4, Baltic International Centre for Economic Policy Studies (BICEPS);Stockholm School of Economics in Riga (SSE Riga).
    13. Juarez, Laura & de la Cabada, Daniel Casarin, 2018. "Downward wage rigidities in the Mexican labor market: 1996–2011," LSE Research Online Documents on Economics 123358, London School of Economics and Political Science, LSE Library.
    14. Johannes Matschke & Jun Nie, 2022. "Downward Wage Rigidities and Recession Dynamics in Advanced and Emerging Economies," Research Working Paper RWP 22-10, Federal Reserve Bank of Kansas City.
    15. D. Lederman & W.F. Maloney & J. Messina, 2011. "The Fall of Wage Flexibility," World Bank Publications - Reports 23575, The World Bank Group.

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    More about this item

    Keywords

    Labor Markets; Income; Economic Theory&Research; Environmental Economics&Policies; Labor Policies;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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