‘ Wage Rigidity and Unemployment in OECD Countries ’

Econometric investigations of individual countries’ experiences with inflation and unemployment in the 1970’s have shown that it is no longer sufficient to simply assume that wages are sticky in order to explain observed macroeconomic phenomena and make policy recommendations. A number of theoretical papers appearing in the last few years, motivated in part by the international econometric comparisons, have shown that the exact form of this stickiness whether it is due to overlapping contracts, to sticky expectations, to indexing, or to a slow recognition of changes in productivity is crucial for an understanding of macroeconomic behavior. This comprehensive empirical analysis by Grubb, Jackman and Layard takes this econometric research further by distinguishing between two important parameters of wage adjustment behavior, and by providing econometric evidence on these parameters for nineteen OECD countries. They also estimate the reaction functions for aggregate demand policy in these countries and examine how these policy reaction functions influence the parameters of the wage adjustment equation. In commenting on the paper, I want to raise some questions about three aspects of their analysis: the distinction made between real and nominal wage rigidity, the policy implications of the estimates, and the specification of the econometric equations.