DOWNWARD NOMINAL WAGE RIGIDITIES BEND THE PHILLIPS CURVE - - PowerPoint PPT Presentation

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Sep 15, 2023 368 likes •941 views

Mary Daly (FRBSF,IZA, and USC) , Bart Hobijn (FRBSF, VU Amsterdam, and TI) DOWNWARD NOMINAL WAGE RIGIDITIES BEND THE PHILLIPS CURVE Disclaimer: The views expressed in this presentation are those of the authors and do not necessarily reflect those

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SLIDE 1

DOWNWARD NOMINAL WAGE RIGIDITIES BEND THE PHILLIPS CURVE

Mary Daly (FRBSF,IZA, and USC), Bart Hobijn (FRBSF, VU Amsterdam, and TI)

Disclaimer: The views expressed in this presentation are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of San Francisco or the Federal Reserve System as a whole.

Daly and Hobijn 1 DNWR bend the Phillips Curve

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SLIDE 2

What we do in this paper…

  • Record-high fraction of U.S. workers with wage

frozen in aftermath of Great Recession.

  • Even as unemployment rate has declined, wage

growth has continued to slow.

  • Introduce model of monetary policy and downward

wage rigidities.

  • Show that transitional dynamics of model of

downward nominal wage rigidities are qualitatively consistent with facts.

Daly and Hobijn DNWR bend the Phillips Curve 2

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SLIDE 3

Our main contribution is…

  • Introduce model of DNWR and monetary policy

Benigno and Ricci (2011)

– Replicate existence of long-run Phillips Curve from other models in the literature.

“Inflation greases the wheels of the labor market” Tobin (1972), Akerlof, Dickens, and Perry (1997), Fagan and Messina (2008), Benigno and Ricci (2011)

  • Focus on transitional dynamics

– Solve for non-linear path in response to a negative demand shock.

Abbritti and Fahr (2013)

– Track the evolution of the distribution of real wages along the equilibrium path.

Solve non-linear transitional dynamics using extended path method by Fair and Taylor (1983)

Daly and Hobijn DNWR bend the Phillips Curve 3

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SLIDE 4

INDIVIDUAL-LEVEL WAGE CHANGES AND THE U.S. WAGE PHILLIPS CURVE

Part I: Three facts about the U.S. labor market

Daly and Hobijn DNWR bend the Phillips Curve 4

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SLIDE 5

NON-NORMAL DISTRIBUTION OF LOG WAGE CHANGES

Fact 1

Daly and Hobijn DNWR bend the Phillips Curve 5

Akerlof, Dickens, and Perry (1996), Kahn (1997), Card and Hyslop (1997), Altonji and Devereux (2000), Lebow, Saks, and Wilson (2003), Gottschalk (2005), Dickens et al. (2007), Elsby (2009), Daly, Hobijn, and Lucking (2012).

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SLIDE 6

Wage cuts are rare

Daly and Hobijn DNWR bend the Phillips Curve 6

2 4 6 8 10 12 14 16 18

  • 20
  • 10

10 20

Source: Current Population Survey and author's calculations.

All workers (hourly and salary, job-stayers and job-switchers)

Distribution of 12-month change in log wages in 2006

Percent

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SLIDE 7

2 4 6 8 10 12 14 16 18

  • 20
  • 10

10 20

Source: Current Population Survey and author's calculations.

All workers (hourly and salary, job-stayers and job-switchers)

Distribution of 12-month change in log wages in 2006

Percent

Rarity of wage cuts well-known

Daly and Hobijn DNWR bend the Phillips Curve 7

  • Individual-level evidence for the U.S.

Akerlof, Dickens, and Perry (1996), Kahn (1997), Card and Hyslop (1997), Altonji and Devereux (2000), Lebow, Saks, and Wilson (2003), Gottschalk (2005), Elsby (2009), Daly, Hobijn, and Lucking (2012).

  • Individual-level evidence across countries

Dickens et al. (2007).

  • Survey evidence

Kahnemann, Knetsch, and Thaler (1986), Bewley (1995, 1999), and Bonin and Radowski (2011)

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SLIDE 8

Shift in distribution of wage changes

Daly and Hobijn DNWR bend the Phillips Curve 8

2 4 6 8 10 12 14 16 18

  • 20
  • 10

10 20

Source: Current Population Survey and author's calculations.

All workers (hourly and salary, job-stayers and job-switchers)

Distribution of 12-month change in log wages

Percent 2011 2006

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SLIDE 9

2 4 6 8 10 12 14 16 18

  • 20
  • 10

10 20

Source: Current Population Survey and author's calculations.

All workers (hourly and salary, job-stayers and job-switchers)

Distribution of 12-month change in log wages

Percent 2011 2006

Increase of spike at zero

Daly and Hobijn DNWR bend the Phillips Curve 9

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SLIDE 10

2 4 6 8 10 12 14 16 18

  • 20
  • 10

10 20

Source: Current Population Survey and author's calculations.

All workers (hourly and salary, job-stayers and job-switchers)

Distribution of 12-month change in log wages

Percent 2011 2006

Compression of wage increases

Daly and Hobijn DNWR bend the Phillips Curve 10

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SLIDE 11

2 4 6 8 10 12 14 16 18

  • 20
  • 10

10 20

Source: Current Population Survey and author's calculations.

All workers (hourly and salary, job-stayers and job-switchers)

Distribution of 12-month change in log wages

Percent 2011 2006

Not many more wage cuts

Daly and Hobijn DNWR bend the Phillips Curve 11

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SLIDE 12

SPIKE AT ZERO COUNTERCYCLICAL

Fact 2

Daly and Hobijn DNWR bend the Phillips Curve 12

Card and Hyslop (1997)

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SLIDE 13

Spike increases in recessions

Daly and Hobijn DNWR bend the Phillips Curve 13

6 8 10 12 14 16 18 2 4 6 8 10 12 14 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Source: Current Population Survey. 12-month centered moving averages

Zero 12-month wage change; All types of workers (hourly, salary, and job switchers, and job stayers)

Unemployment rate and rate of no wage change

Percent Percent Rate of no wage change Unemployment rate (left axis)

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SLIDE 14

6 8 10 12 14 16 18 2 4 6 8 10 12 14 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Source: Current Population Survey. 12-month centered moving averages

Zero 12-month wage change; All types of workers (hourly, salary, and job switchers, and job stayers)

Unemployment rate and rate of no wage change

Percent Percent Rate of no wage change Unemployment rate (left axis)

Record-high spike after Great Recession

Daly and Hobijn DNWR bend the Phillips Curve 14

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SLIDE 15

6 8 10 12 14 16 18 2 4 6 8 10 12 14 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Source: Current Population Survey. 12-month centered moving averages

Zero 12-month wage change; All types of workers (hourly, salary, and job switchers, and job stayers)

Unemployment rate and rate of no wage change

Percent Percent Rate of no wage change Unemployment rate (left axis)

Spike trails peak in unemployment rate

Daly and Hobijn DNWR bend the Phillips Curve 15

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SLIDE 16

U.S. WAGE PHILLIPS CURVE IS BENT

Fact 3

Daly and Hobijn DNWR bend the Phillips Curve 16

Phillips (1958), Samuelson and Solow (1960), Galí (2011)

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SLIDE 17

Composite measure of wage growth

Daly and Hobijn DNWR bend the Phillips Curve 17

1 2 3 4 5 6 7 8 9 1986 1991 1996 2001 2006 2011 CPH ECI MWE AHE Principal Component

Source:Bureau of Labor Statistics and FRBSF calculations

4-quarter percent change

Four Measures of Nominal Compensation Growth

Percent

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SLIDE 18

High unemployment low wage growth

Daly and Hobijn DNWR bend the Phillips Curve 18

  • 3

3 6

  • 1.5
  • 1
  • 0.5

0.5 1 1.5 2 2.5 3 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Nominal wage growth gap Unemployment gap

Source: Bureau of Labor Statistics and authors' calculations

4-quarter moving average

Nominal wage growth and unemployment gaps

Percentage points Percentage points

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SLIDE 19

U.S. wage Phillips curve bent

Daly and Hobijn DNWR bend the Phillips Curve 19

2008 2009 2010 2011 2012 2013

  • 2
  • 1

1 2 3

  • 2
  • 1

1 2 3 4 5

Source: Bureau of Labor Statistics and authors' calculations

Nominal wage growth is 4Q change

U.S. Wage Phillips Curve: 1986-2012

Unemployment gap

Nominal wage growth gap

Before 2007 recession Since 2007 recession

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SLIDE 20

2008 2009 2010 2011 2012 2013

  • 2
  • 1

1 2 3

  • 2
  • 1

1 2 3 4 5

Source: Bureau of Labor Statistics and authors' calculations

Nominal wage growth is 4Q change

U.S. Wage Phillips Curve: 1986-2012

Unemployment gap

Nominal wage growth gap

Before 2007 recession Since 2007 recession

Wage growth leveled off when unemployment rose

Daly and Hobijn DNWR bend the Phillips Curve 20

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SLIDE 21

2008 2009 2010 2011 2012 2013

  • 2
  • 1

1 2 3

  • 2
  • 1

1 2 3 4 5

Source: Bureau of Labor Statistics and authors' calculations

Nominal wage growth is 4Q change

U.S. Wage Phillips Curve: 1986-2012

Unemployment gap

Nominal wage growth gap

Before 2007 recession Since 2007 recession

Wage growth decelerated and unemployment declined

Daly and Hobijn DNWR bend the Phillips Curve 21

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SLIDE 22

Similar pattern across recessions

Daly and Hobijn DNWR bend the Phillips Curve 22

  • 2
  • 1

1 2 3

  • 2
  • 1

1 2 3 4 5

Source: Bureau of Labor Statistics and authors' calculations

Nominal wage growth is 4Q change

U.S. Wage Phillips Curve: 1986-2012

Unemployment gap

Nominal wage growth gap

1990 recession 2001 recession 2007 recession

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SLIDE 23

MODEL OF MONETARY POLICY AND DOWNWARD NOMINAL WAGE RIGIDITIES

Part II: Sketch of model

Daly and Hobijn DNWR bend the Phillips Curve 23

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SLIDE 24

Standard aggregate demand side

Aggregate demand curve determined by standard IS-curve and monetary policy rule

  • IS-curve

Consumption Euler equation

  • Monetary policy rule

Standard Taylor Rule

Taylor (1993), Rudebusch (2009)

Daly and Hobijn DNWR bend the Phillips Curve 24

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SLIDE 25

No distortions in the goods market

  • Production function is linear in labor.
  • Perfectly competitive market of goods

producers.

  • Price equals unit labor cost,

Nominal wage corrected for productivity growth

Daly and Hobijn DNWR bend the Phillips Curve 25

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SLIDE 26

Wages are distorted

  • Wages set by workers

Erceg, Henderson, and Levin (2000)

  • DNWR: Fixed probability, 𝜇, of a worker not

being allowed to adjust wage downwards.

Calvo (1983), Fagan and Messina (2008)

  • Idiosyncratic shocks to labor supply, 𝑎𝑗𝑢.

Benigno and Ricci (2011)

– Productivity shocks give similar representation of equilibrium dynamics of aggregates. Fagan and Messina (2008)

Daly and Hobijn DNWR bend the Phillips Curve 26

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SLIDE 27

Implications of DNWR for wage setting

  • DNWR constraint:

Workers who, in absence of constraint, would have lowered their wages keep them fixed.

– Work less than under flexible wages.

  • Subdued wage increases:

Workers who change their wages set them lower than under flexible wages.

– Work more than under flexible wages.

Elsby (2009), Ball and Mankiw (1994)

Daly and Hobijn DNWR bend the Phillips Curve 27

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SLIDE 28

Long-run Phillips curve due to DNWR

Daly and Hobijn DNWR bend the Phillips Curve 28

inflation,  unemployment, u LRPC

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SLIDE 29

Aggregate demand side: IS and MPR

Daly and Hobijn DNWR bend the Phillips Curve 29

inflation,  unemployment, u AD LRPC

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SLIDE 30

Recession: Drop in aggregate demand

Daly and Hobijn DNWR bend the Phillips Curve 30

inflation,  unemployment, u AD LRPC

Negative discount rate shock increases households’ propensity to save.

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SLIDE 31

Results in short-run trade-off

Daly and Hobijn DNWR bend the Phillips Curve 31

inflation,  unemployment, u AD LRPC SRPC

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SLIDE 32

inflation,  unemployment, u AD LRPC SRPC

Traced out by transitional dynamics

Daly and Hobijn DNWR bend the Phillips Curve 32

Short-run Phillips curve (SRPC): Equilibrium path in response to negative demand shock that generates a recession.

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SLIDE 33

inflation,  unemployment, u AD LRPC SRPC

SRPC bent in two ways

Daly and Hobijn DNWR bend the Phillips Curve 33

Short-run Phillips curve (SRPC): 1. Initial response depends on degree of DNWR. 2. Bent path back to steady state due to pent up wage deflation.

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SLIDE 34

inflation,  unemployment, u AD LRPC SRAS

Bending induced by shift in SRAS

Daly and Hobijn DNWR bend the Phillips Curve 34

Short-run aggregate supply curve (SRAS) Short-run response in wage setting and unemployment to change in inflation

slide-35
SLIDE 35

Bending induced by shift in SRAS

Daly and Hobijn DNWR bend the Phillips Curve 35

inflation,  unemployment, u AD LRPC SRAS

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SLIDE 36

inflation,  unemployment, u AD LRPC SRAS

Shock also acts as supply shock

Daly and Hobijn DNWR bend the Phillips Curve 36

DNWR make position of SRAS depend

  • n discount

rate and future inflation. Curve shifts

  • utward in

response to shock

slide-37
SLIDE 37

LONG-RUN (STEADY-STATE) AND SHORT-RUN (TRANSITIONAL DYNAMICS) TRADE-OFFS

Part II: Results

Daly and Hobijn DNWR bend the Phillips Curve 37

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SLIDE 38

REPLICATE LONG-RUN INFLATION-UNEMPLOYMENT TRADE-OFF

Steady State

Daly and Hobijn DNWR bend the Phillips Curve 38

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SLIDE 39

Distortion due to downward wage rigidities

Daly and Hobijn DNWR bend the Phillips Curve 39

10 20 30 40 50 60 1 2 3 4 5 6 7 8 9 10

  • 20
  • 15
  • 10
  • 5

5 10 15 20

Source: Authors' calculations

Quarterly changes in log wage under flexible wages and DNWR

Steady-State Density of Log Wage Changes

( ) Frequency (percent) Spike at zero (percent) Flexible DNWR DNWR Spike

(right axis)

5

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SLIDE 40

Long-run unemployment-inflation trade-off

Daly and Hobijn DNWR bend the Phillips Curve 40

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8

Source: Author's calculations

Steady-state trade off between unemployment and inflation

Long-Run Phillips Curve

Unemployment rate Inflation (annualized rate)

slide-41
SLIDE 41

SLOPE AND CURVATURE OF SHORT-RUN PHILLIPS CURVE

Transitional Dynamics

Daly and Hobijn DNWR bend the Phillips Curve 41

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SLIDE 42

NON-NORMAL DISTRIBUTION OF LOG WAGE CHANGES

Result 1

Daly and Hobijn DNWR bend the Phillips Curve 42

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SLIDE 43

Shift in distribution of wage changes

Daly and Hobijn DNWR bend the Phillips Curve 43

10 20 30 40 50 60 70 80 1 2 3 4 5 6 7 8 9 10

  • 10 -9
  • 8
  • 7
  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 5 6 7 8 9 10

Source: Authors' calculations

In steady state at time and after shock at at .

Distribution of quarterly log wage changes

Frequency (percent) Spike at zero (percent) Steady State Spike at 0 in steady state (right axis) After shock at Spike at 0 after shock at (right axis)

slide-44
SLIDE 44

10 20 30 40 50 60 70 80 1 2 3 4 5 6 7 8 9 10

  • 10 -9
  • 8
  • 7
  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 5 6 7 8 9 10

Source: Authors' calculations

In steady state at time and after shock at at .

Distribution of quarterly log wage changes

Frequency (percent) Spike at zero (percent) Steady State Spike at 0 in steady state (right axis) After shock at Spike at 0 after shock at (right axis)

Increase of spike at zero

Daly and Hobijn DNWR bend the Phillips Curve 44

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SLIDE 45

10 20 30 40 50 60 70 80 1 2 3 4 5 6 7 8 9 10

  • 10 -9
  • 8
  • 7
  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 5 6 7 8 9 10

Source: Authors' calculations

In steady state at time and after shock at at .

Distribution of quarterly log wage changes

Frequency (percent) Spike at zero (percent) Steady State Spike at 0 in steady state (right axis) After shock at Spike at 0 after shock at (right axis)

Compression of wage increases

Daly and Hobijn DNWR bend the Phillips Curve 45

slide-46
SLIDE 46

10 20 30 40 50 60 70 80 1 2 3 4 5 6 7 8 9 10

  • 10 -9
  • 8
  • 7
  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 5 6 7 8 9 10

Source: Authors' calculations

In steady state at time and after shock at at .

Distribution of quarterly log wage changes

Frequency (percent) Spike at zero (percent) Steady State Spike at 0 in steady state (right axis) After shock at Spike at 0 after shock at (right axis)

Not many more wage cuts

Daly and Hobijn DNWR bend the Phillips Curve 46

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SLIDE 47

This is the data-equivalent

Daly and Hobijn DNWR bend the Phillips Curve 47

2 4 6 8 10 12 14 16 18

  • 20
  • 10

10 20

Source: Current Population Survey and author's calculations.

All workers (hourly and salary, job-stayers and job-switchers)

Distribution of 12-month change in log wages

Percent 2011 2006

slide-48
SLIDE 48

SPIKE AT ZERO COUNTERCYCLICAL

Result 2

Daly and Hobijn DNWR bend the Phillips Curve 48

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SLIDE 49

Spike at zero peaks after shock

Daly and Hobijn DNWR bend the Phillips Curve 49

4 4.5 5 5.5 6 6.5 7 7.5 8 0 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930

Source: Authors' calculations

For , , and , where

Unemployment rate and spike at zero wage changes

Quarters since demand shock, Percent Unemployment rate Fraction of workers with no wage change

  • ver 4 quarters
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SLIDE 50

Remember the data?...

Daly and Hobijn DNWR bend the Phillips Curve 50

6 8 10 12 14 16 18 2 4 6 8 10 12 14 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Source: Current Population Survey. 12-month centered moving averages

Zero 12-month wage change; All types of workers (hourly, salary, and job switchers, and job stayers)

Unemployment rate and rate of no wage change

Percent Percent Rate of no wage change Unemployment rate (left axis)

slide-51
SLIDE 51

WAGE PHILLIPS CURVE IS BENT

Result 3

Daly and Hobijn DNWR bend the Phillips Curve 51

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SLIDE 52

Wage Phillips curve bent

Daly and Hobijn DNWR bend the Phillips Curve 52

  • 2
  • 1

1 2 3 4.5 5 5.5 6 6.5 7 7.5 8

Source: Authors' calculations

For three degrees of downward nominal wage rigidities

Short-run Wage Phillips Curve - benchmark simulation

Unemployment rate Wage growth gap (annualized) = 0.90 ,

slide-53
SLIDE 53
  • 2
  • 1

1 2 3 4.5 5 5.5 6 6.5 7 7.5 8

Source: Authors' calculations

For three degrees of downward nominal wage rigidities

Short-run Wage Phillips Curve - benchmark simulation

Unemployment rate Wage growth gap (annualized) = 0.90 ,

Unemployment spikes after shock

Daly and Hobijn DNWR bend the Phillips Curve 53

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SLIDE 54
  • 2
  • 1

1 2 3 4.5 5 5.5 6 6.5 7 7.5 8

Source: Authors' calculations

For three degrees of downward nominal wage rigidities

Short-run Wage Phillips Curve - benchmark simulation

Unemployment rate Wage growth gap (annualized) = 0.90 ,

Pent up wage deflation realized during recovery

Daly and Hobijn DNWR bend the Phillips Curve 54

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SLIDE 55

Here is the empirical equivalent

Daly and Hobijn DNWR bend the Phillips Curve 55

  • 2
  • 1

1 2 3

  • 2
  • 1

1 2 3 4 5

Source: Bureau of Labor Statistics and authors' calculations

Nominal wage growth is 4Q change

U.S. Wage Phillips Curve: 1986-2012

Unemployment gap

Nominal wage growth gap

1990 recession 2001 recession 2007 recession

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SLIDE 56

Conclusion

  • Record-high fraction of U.S. workers with wage frozen in

aftermath of Great Recession.

  • Even as unemployment rate has declined, wage growth has

continued to slow.

  • Dynamics of simple model of downward nominal wage rigidities

is qualitatively consistent with facts.

  • Downward nominal wage rigidities have played a role in shaping

dynamics of wage growth and unemployment during last 3 U.S. business cycles.

  • Downward nominal wage rigidities also important in Europe.

Dickens et al. (2007), Bonin and Radowski (2011), Whelan (2012), Schmidt-Grohe and Uribe (2013)

Daly and Hobijn DNWR bend the Phillips Curve 56