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The relative adjustment of wages and prices: direct tests within a multiple-equation system

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Abstract:

In order to assess the relative rigidity of the aggregate price level and the nominal wage rate most researchers have focused on the implied behaviour of the real wage rate in response to a purely demand disturbance. The present work examines the explicit behaviour of the two variables and is therefore able to analyse the variables' short-run responses within the context of their defined long-run behaviour. While the paper reports evidence of long-run stability in the real wage rate, additional evidence is presented which supports both sticky-price and sticky-wage models. The determining factor is the choice of lag.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/0003684032000056779

Affiliations: Department of Economics, Portland State University, P.O. Box 751, Portland, OR 97207-0751, USA, E-mail: schmidtm@pdx.edu

Publication date: May 1, 2003

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