Affiliation:
1. Department of Economics, University of California at Berkeley, 530 Evans Hall, Berkeley, CA 94720 (email: )
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. (JEL E24, E31, J23, J31, O15, O18, R23)
Publisher
American Economic Association
Subject
Economics and Econometrics
Cited by
88 articles.
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