Nominal Wage Rigidity in Village Labor Markets
American Economic Review · 2019 · Volume 109 · Issue 10
Abstract
This paper develops a new approach to test for downward wage rigidity by examining transitory shocks to labor demand (i.e., rainfall) across 600 Indian districts. Nominal wages rise during positive shocks but do not fall during droughts. In addition, transitory positive shocks generate ratcheting: after they have dissipated, wages do not adjust back down. Ratcheting reduces employment by 9 percent, indicating that rigidities distort employment levels. Inflation, which is unaffected by local rainfall, enables downward real wage adjustments—offering causal evidence for its labor market effects. Surveys suggest that individuals believe nominal wage cuts are unfair and lead to effort reductions.
Keywords
Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital, Aggregate Labor Productivity, Price Level, Inflation, Deflation, Labor Demand, Wage Level and Structure, Wage Differentials, Economic Development: Human Resources, Human Development, Income Distribution, Migration, Economic Development: Urban, Rural, Regional, and Transportation Analysis, Housing, Infrastructure, Urban, Real Estate, and Transportation Economics: Regional Migration, Regional Labor Markets, Population, Neighborhood Characteristics
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