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Wage Rigidity And Disinflation In Emerging Countries

Date Added: Jun 2011
Format: PDF

This paper examines the consequences of rapid disinflation for downward wage rigidities in two emerging countries, Brazil and Uruguay, relying on high quality matched employer-employee administrative data. Downward nominal wage rigidities are more important in Uruguay, while wage indexation is dominant in Brazil. Two regime changes are observed during the sample period, 1995-2004: in Uruguay wage indexation declines, while workers' resistance to nominal wage cuts becomes more pronounced; and in Brazil, the introduction of inflation targeting by the Central Bank in 1999 shifts the focal point of wage negotiations from changes in the minimum wage to expected inflation.