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International Spill-over Effects of Labour Market Rigidities

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  • Spange, Morten

    ()
    (Department of Economics Aarhus, Denmark)

Abstract

This paper analyses the implications of real wage rigidities in a stochastic two-country general equilibrium model. It is shown how real wage rigidities in one country affect welfare in both countries. Assuming that the choice of whether or not to adopt flexible wages is in the hands of labour unions within each country, it is found that wages will be flexible in either no, one or both countries. Hence, even in this symmetric model flexible wages in one country and rigid wages in the other may be an equilibrium. Since there are international spillover effects of the choice of wage setting regime, the utilitarian solution is also considered. Interestingly, this does not necessarily entail more real wage flexibility than in the Nash equilibrium.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2003-12.

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Length: 37
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Handle: RePEc:aah:aarhec:2003-12

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Real Wage Rigidity; Labour Market Reforms; Spill-over Effects; Open Economy;

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  1. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
  2. Beetsma, Roel M.W.J. & Jensen, Henrik, 2005. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Journal of International Economics, Elsevier, vol. 67(2), pages 320-352, December.
  3. Erlandsson, Mattias, 2002. "Nominal Wage Flexibility in a Monetary Union," Working Papers in Economics 80, University of Gothenburg, Department of Economics.
  4. Agell, J., 1998. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Papers 1998:17, Uppsala - Working Paper Series.
  5. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, vol. 63(2), pages 293-320, July.
  6. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
  7. Beetsma, R.M.W.J. & Schotman, P.C., 1998. "Measuring Risk Attitudes in a Natural Experiment: Data from The Television Game Show LINGO," Papers 98-48, Southern California - School of Business Administration.
  8. Andersen, Torben M & Spange, Morten, 2002. "International Interdependencies in Fiscal Stabilization Policies," CEPR Discussion Papers 3580, C.E.P.R. Discussion Papers.
  9. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  10. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  11. Ball, Laurence & Romer, David, 1991. "Sticky Prices as Coordination Failure," American Economic Review, American Economic Association, vol. 81(3), pages 539-52, June.
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Cited by:
  1. Andersen, Torben M & Spange, Morten, 2002. "International Interdependencies in Fiscal Stabilization Policies," CEPR Discussion Papers 3580, C.E.P.R. Discussion Papers.
  2. Andersen, Torben M., 2008. "Heterogenous wage formation under a common monetary policy," Economic Modelling, Elsevier, vol. 25(4), pages 740-771, July.

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