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Bank of Canada Review

Winter 1998-1999

Index of Working Papers | Index of Technical Reports
Title Downward wage rigidity
Author(s) Allan Crawford and Seamus Hogan
Type Bank of Canada Review article
Date of
Winter 1998–1999
Language English and French
Abstract There has recently been considerable discussion about the ability of inflation to facilitate the adjustment of prices and wages and thus enhance economic performance. The discussion centres on whether wages are downwardly rigid. Wages are said to be downwardly rigid if it is difficult for the wages of some workers to fall despite underlying supply and demand pressures for decreases. Some authors have suggested that if downward nominal wage rigidity is prevalent it would be desirable to select a positive rate of inflation as the target for monetary policy.

In this article, the authors evaluate the wage-rigidity hypothesis. They first examine the empirical evidence to assess whether the degree of downward rigidity is significant in Canada. They then analyze some key assumptions of the wage-rigidity hypothesis and its implications for employment. They also look at the empirical evidence on whether the combination of downward wage rigidity and low inflation has reduced employment.

topic index
Inflation: costs and benefits

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