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Lessons of the Wage Dynamics Network

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Author Info

  • G. de Walque

    (National Bank of Belgium, Research Department)

  • M. Druant

    (National Bank of Belgium, Research Department)

  • Ph. Du Caju

    (National Bank of Belgium, Research Department)

  • C. Fuss

    (National Bank of Belgium, Research Department)

Abstract

The Wage Dynamics Network (WDN) is a temporary research network with the main objective of identifying the characteristics of wage dynamics and drawing conclusions from them in monetary policy terms. The paper presents the main findings of this research work. Notably, the intersectoral wage differential can be partly attributed to differences in profitability and the degree of competition to which the sectors are exposed. Nominal wages are adjusted less frequently than prices and adjustments generally tend to be made at regular intervals rather than in response to the economic climate. Wage rigidity not only affects existing workers, but also new recruits. The euro area, and Belgium in particular, is marked more by rigid real wages than nominal wages. Real wage rigidity implies a low optimal inflation rate and tends to complicate the conduct of monetary policy since it triggers greater fluctuations in output and employment and makes inflation more persistent. Furthermore, in a monetary union, countries with higher real wage rigidity suffer a loss of competitiveness in the event of negative productivity shocks. Institutions underlying wagesetting generally play an important role in the way in which firms and economies react to shocks. The heterogeneity of these institutions within the euro area therefore presents a real challenge for monetary policy.

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Bibliographic Info

Article provided by National Bank of Belgium in its journal Economic Review.

Volume (Year): (2010)
Issue (Month): I (June)
Pages: 55-75

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Handle: RePEc:nbb:ecrart:y:2010:m:june:i:i:p:55-75

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Related research

Keywords: firms’ behavior; wage rigidity; employment; monetary policy; labour market flexibility; labour market institutions; economic shocks;

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