Downward nominal wage rigidity in Japan

This paper analyzes whether or not Japanese nominal wages exhibit downward rigidity. We posit a wage adjustment model in which, below a certain wage i nflation rate, wages may or may not move as much as optimal or notional wag es do. By using data on wages of 18 industries and aggregate time series da ta, we find that nominal wages were rigid downward until 1998, but not with the inclusion of years 1999 and 2000. That is, Japanese wages responded fl exibly downward to the recession of 1997-1998, but with a lag. The interpre tation of such results is not straightforward. But we provide some prelimin ary discussions of possible factors behind such a pattern of wage movements , focusing on the relationship between wage changes and the seniority-based wage system. (C) 2001 Academic Press.