Vol.21, No.2 / August 2003

Are Japanese Nominal Wages Downwardly Rigid? (Part II):
Examinations Using a Friction Model

Sachiko Kuroda and Isamu Yamamoto

This paper confirms the existence of downward nominal wage rigidity in Japan as presented in Kuroda and Yamamoto (2003a) and quantifies the extent of this downward nominal wage rigidity by applying econometric methods to Japanese longitudinal data. Using 1993-98 data, we find that downward nominal wage rigidity does exist in Japan even after controlling the individual characteristics and the measurement errors in reported nominal wages. In addition, we find that the extent of the downward nominal wage rigidity is sensitive to the choice of wage measures. While the hourly wages of part-time female employees exhibit almost complete downward rigidity, the extents of the downward rigidity are limited for the regular monthly salaries and annual earnings of full-time employees. For example, our estimates show that the regular monthly salaries of full-time male and female employees will not be cut as long as the notional wages do not decline by more than about 7.7 percent and 4.0 percent, respectively. However, when the notional wage change rates exceed these threshold values, nominal wage cuts do occur.

Key words: Downward nominal wage rigidity; Inflation rate; Monetary policy; Longitudinal data; Measurement errors; Friction model; Simulated maximum likelihood


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