revised version published in: Economic Journal, 2007, 117, 508-529
The paper examines real and nominal wage rigidities. We estimate a switching regime
model, in which the observed distribution of individual wage changes, computed from West
German register data for 1976-1997, is generated by simultaneous processes of real,
nominal or no wage rigidity, and measurement error. The fraction of workers facing wage
increases that are due to nominal, but mostly real wage rigidity is substantial. The extent of
real rigidity rises with inflation, whereas the opposite holds for nominal rigidity. Overall, the
incidence of wage rigidity, which accelerates unemployment growth, is most likely minimized
in an environment with moderate inflation.
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