A Signalling Theory of Nominal Wage Inflexibility

A model of learning in local labor markets is constructed in which the emphasis placed by employers on job applicants' employment histories induces workers to reject low nominal wages to avoid subsequently signalling a low ability. This 'wage censoring'behavior leads to inefficiently high levels of unemployment and generates an apparent downwardly inflexible nominal wage. Monetary policy may be of use if it affects the quality of the nominal wage signal. Copyright 1993 by Royal Economic Society.