Sectoral heterogeneity in wage stickiness and monetary policy transmission

It is well known that introducing sectoral heterogeneity in price stickiness amplifies monetary non-neutrality in standard New Keynesian models (Carvalho, 2006). Yet, less attention has been paid to the role of heterogeneity in wage stickiness. Using industry-level data, I document a statistically significant negative correlation of –0.27 between wage and price rigidity at the 3-digit NAICS level. I then develop a multi-sector New Keynesian model that incorporates heterogeneity in both wage and price rigidities. The model shows that, depending on the correlation between sectoral wage and price rigidities, the cumulative real response to a monetary shock can either be amplified or dampened relative to a benchmark economy with only heterogeneous price rigidity. Specifically, a perfectly positive correlation between sectoral wage and price rigidities amplifies the cumulative real response by up to 14 percent, whereas a perfect negative correlation reduces it by approximately 9 percent. However, in the model empirically calibrated to the 53-sector U.S. economy, the aggregate impact of wage rigidity heterogeneity is limited, as the weak observed correlation and the influence of large, moderately rigid sectors mute the underlying transmission channel.