WPS5863
POLICY RESEARCH WORKING PAPER                       5863
Wage Rigidity and Disinflation
in Emerging Countries
Julidn Messina
Anna Sanz-de-Galdeano
The World Bank
Latin America and the Caribbean Region
Office of the Regional Chief Economist
October 2011


POLICY RESEARCH WORKING PAPER 5863
Abstract
This paper examines the consequences of rapid                      declines, while workers' resistance to nominal wage
disinflation for downward wage rigidities in two                   cuts becomes more pronounced; and (ii) in Brazil, the
emerging countries, Brazil and Uruguay, relying on high            introduction of inflation targeting by the Central Bank
quality matched employer-employee administrative data.            in 1999 shifts the focal point of wage negotiations from
Downward nominal wage rigidities are more important                changes in the minimum wage to expected inflation.
in Uruguay, while wage indexation is dominant in Brazil.           These regime changes cast doubts on the notion that
Two regime changes are observed during the sample                  wage rigidity is structural in the sense of Lucas (1976).
period, 1995-2004: (i) in Uruguay wage indexation
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The author may be contacted at jmessina@worldbank.org.
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