Nominal and real wage rigidities. In theory and in Europe

In this paper I study the relation between real wage rigidity (RWR) and nominal price and wage rigidities. I show that in a standard DSGE model RWR is mainly affected by the two nominal rigidities and not by the other structural parameters. The degree of RWR is, however, considerably influenced by the modelling assumption (e.g. Calvo vs. Taylor wage contracts and the clustering of contracts). I use empirical estimates for the duration of prices and wages for 15 European countries to calculate the degrees of RWR implied by the theoretical model. I then compare these values to existing cross-country evidence on real rigidities. The model-based measures show much less variation than can be found in the data. Furthermore, the ranking of countries according to the model-based measures show no clear relation to various empirical measures. This suggests that the standard model omits institutional characteristics that are crucial for cross-country differences in RWR.