Olivier Blanchard

Much attention has been focused on the zero lower bound for nominal interest rates. There is another nominal lower bound which may be equally important, the zero lower bound on nominal wage changes. A particular striking example is that of Portugal. The video below shows the evolution of the distribution of nominal wage changes for stayers for each year from 2003 to 2024. Note the dramatic bunching at zero during 2009-2013, a time when inflation was low and unemployment very high. (Source: My co-author, Pedro Portugal, based on Linked employer-employee dataset Quadros de Pessoal.) Deflation may thus lead both to higher real rates and higher real wages. Not a pleasant outcome when one is trying to increase activity. Admittedly, right now, none of the two ZLBs is an immediate preoccupation. But both were costly not so long ago, and should not be forgotten.