There are nominal rigidities in Indian villages too

Supreet Kaur has a new NBER paper on this:

This paper tests for downward nominal wage rigidity in markets for casual daily agricultural labor in a developing country context. I examine transitory shifts in labor demand, generated by rainfall shocks, in 600 Indian districts from 1956-2009. First, there is asymmetric adjustment: nominal wages rise in response to positive shocks but do not fall during droughts. Second, transitory positive shocks generate ratcheting: after they have dissipated, nominal wages do not adjust back down. Third, inflation moderates these effects, enabling downward real wage adjustments both during droughts and after positive shocks. Fourth, wage distortions generate employment distortions, creating boom and bust cycles: employment is 9% lower in the year after a transitory positive shock than if the positive shock had not occurred. Fifth, consistent with the misallocation of labor across farms, households with small landholdings increase labor supply to their own farms when they are rationed out of the external labor market. The results are not consistent with other transmission mechanisms, such as migration or capital accumulation. These findings indicate the presence of rigidities in a setting with few institutional constraints. Survey evidence suggests that workers and employers believe that nominal wage cuts are unfair and lead to effort reductions.

There are ungated versions here.  I am often puzzled, by the way, that we do not spend much more time studying nominal rigidities, which are the source of rather considerable deadweight losses.   We do not find nominal rigidities everywhere.  Salespeople working on commission often have flexible wages, as do (some) people working in high-trust, high morale organizations.  What exactly accounts for these differences and how much can they be replicated?  What are their psychological costs?  Are there personality types which can deal with nominal flexibility of wages and types who cannot?  How frequent is one type relative to the other?  How do the psychological costs of a wage cut compare to the psychological costs of suffering losses when running your own business?  Questions such as these should be much higher on the list of research priorities.


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