Dual Wage Rigidities: Theory and Some Evidence

This paper investigates wage dynamics assuming the potential presence of dual wage stickiness: with respect to both the frequency as well as the size of wage adjustments. In particular, this paper proposes a structural model of wage inflation dynamics assuming that although workers adjust wage contracts at discrete time intervals, they are limited in their abilities to adjust wages as much as they might desire. The dual wage stickiness model nests the baseline model, based on Calvo-type wage stickiness, as a particular case. Empirical results favor the dual sticky wage model over the baseline model that assumes only one type of wage stickiness in several dimensions. In particular, it outperforms the baseline model in terms of goodness of fitness as well as in the ability to explain the observed dynamic correlation between wage inflation and the output gap which the baseline model fails to capture. JEL Classification: E31, E32, J30