How Fast Wages Adjust to Prices: A Multi Country Analysis

The adjustment of nominal wages to inflation has implications on the labor market as well as on other areas in economics. In this paper, we employ the Blanchard and Katz (1997, 1999) model of nominal wage determination and try to estimate the adjustment speed. By using the bounds testing approach for cointegration and error-correction modeling we distinguish the short run from the long run. The model is estimated for 29 countries using annual data over the period 1975-2006. We find that inflation, unemployment rate, and labor productivity all have short-run and long-run effects for the majority of the countries. However, nominal wages adjust to inflation fully in 11 of the 29 counties.