Real and nominal wage adjustment in open economies

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Working paper


How are wages set in an open economy? What role is played by demand pres­sure, international competition, and structural factors in the labour market? How important is nominal wage rigidity and exchange rate policy for the me­dium term evolution of real wages and competitiveness? To answer these questions, we formulate a theoretical model of wage bargaining in an open economy and use it to derive a simple wage equation where all parameters have clear economic interpretations. We estimate the wage equation on data for ag­gregate manufacturing wages in Denmark, Finland, Norway, and Sweden from the mid 1960s to the mid 1990s.

Keywords: Wage formation, efficiency wage, turnover, bargaining, rent sharing, nominal wage rigidity, exchange rate policy, competitiveness 
JEL codes: E52, F33, F41, J31, J51, J63, J64