RDP 2000-08: Nominal Wage Rigidity in Australia 9. Conclusions

There has been a longstanding presumption that downward nominal wage rigidity is pronounced in Australia but, until now, a lack of appropriate data has precluded an empirical investigation. The main novelty of this paper is to utilise a newly available data set and demonstrate the nature and extent of nominal wage rigidity in Australia. The results add to the large body of evidence that nominal wages are rigid downwards. More important is the finding that broad measures of earnings also display downward rigidity, just to a lesser extent than wages. This suggests only a small role for variations in non-wage remuneration to offset the effects of wage rigidity.

Part of the observed rigidity can be described as artificial, due to the effects of contract duration and self-selection, and part may not be binding if employers can find other ways of securing desired adjustment in their labour costs. However, there is a possibility that the remaining nominal frictions, even if rationally based, lead to sub-optimal macro outcomes. We might query whether the extent of nominal wage rigidity we have observed would survive regime changes in the inflation environment or other macroeconomic conditions. But if ‘we suspect that wage rigidity is deeply rooted, not ephemeral or characteristic of a particular set of institutions or legal structures … policy should be framed recognising its existence’ (Akerlof et al 1996, pp 51–52). The extent of rigidity we observe in Australia suggests that small positive rates of inflation, rather than absolute price stability, may be helpful in facilitating the adjustment of real output and employment to shocks.