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  3. American Economic Review
  4. October 2019
  5. Nominal Wage Rigidity in Village Labor Markets

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Nominal Wage Rigidity in Village Labor Markets

  • Supreet Kaur
American Economic Review
vol. 109, no. 10, October 2019
(pp. 3585–3616)
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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.

Citation

Kaur, Supreet. 2019. "Nominal Wage Rigidity in Village Labor Markets." American Economic Review, 109 (10): 3585–3616. DOI: 10.1257/aer.20141625

Additional Materials

JEL Classification

  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E31 Price Level; Inflation; Deflation
  • J23 Labor Demand
  • J31 Wage Level and Structure; Wage Differentials
  • O15 Economic Development: Human Resources; Human Development; Income Distribution; Migration
  • O18 Economic Development: Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
  • R23 Urban, Rural, Regional, Real Estate, and Transportation Economics: Regional Migration; Regional Labor Markets; Population; Neighborhood Characteristics