Asking About Wages: Results from the Bank of Canada's Wage Setting Survey

The pervasiveness and nature of labour market rigidities and their implications for the functioning of the macro economy and the conduct of monetary policy have been a recurrent theme in the economics literature since, at least, the work of Keynes in the 1930s. While the issue has never really gone away, there has been a renewed focus recently on the importance of labour market rigidities in shaping economic dynamics in the context of the New Keynesian model, which has become the workhorse model in modern macroeconomic analysis. A consensus has emerged in this literature that both sticky wages and sticky prices are needed to account for the persistence in aggregate output and inflation and to explain the real effects of monetary shocks that are observed in the data for a broad range of economies (see for example, Christiano, Eichenbaum and Evans (2005) and Huang and Liu (2002)). Moreover, the nature of the wage rigidity matters. For instance, Levin et al (2005), using a micro-founded macroeconomic model, show that replacing Calvo-style wage contracts with Taylor-style contracts substantially modifies the optimal monetary policy. They conclude that further research on the structure of labour markets is likely to yield substantial benefits for the design of monetary policy.