The Relationship between Nominal Wage and Price Flexibility : New Evidence

The frequencies at which prices and wages are adjusted, interpreted as price and wage flexibility, are key elements in workhorse models used for policy analysis. Yet, there is little evidence regarding the relationship between these two sources of nominal rigidities. This paper studies whether industries that tend to change more frequently wages are those resetting prices more often. Using two large and highly disaggregated price and wage micro-datasets, the analysis provides evidence that more frequent wage revisions result in more frequent price adjustments. While the literature has looked at the inverse relationship between labor share and price flexibility, the results in this study provide direct evidence that wage flexibility matters for price flexibility. Our findings have implications for New Keynesian models’ microfoundations. Their predictions have proven to be sensitive when heterogeneous nominal rigidities, as observed in microdata, are taken seriously