Wage Rigidity in the United States: The Role of Price Expectations

In this paper a model is constructed which enables the determination of wage rigidity in the United States. In this model wage changes result from a confrontation of intended and actual wage changes. In such a process expected prices obviously play an important role. For this reason the model is estimated under various assumptions regarding the formation of price expectations. The study suggests that US wages are highly flexible and that prices are fully indexed. These results appear to be robust as they do not depend on the assumption concerning the nature of expected prices.