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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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References

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  1. Agell, J., 1998. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Papers 1998:17, Uppsala - Working Paper Series.
  2. Erlandsson, Mattias, 2002. "Nominal Wage Flexibility in a Monetary Union," Working Papers in Economics 80, University of Gothenburg, Department of Economics.
  3. 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.
  4. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  5. Obstfeld, Maurice & Rogoff, Kenneth, 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research, Working Paper Series qt5pf7g8sh, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  6. Andersen, Torben M & Spange, Morten, 2002. "International Interdependencies in Fiscal Stabilization Policies," CEPR Discussion Papers 3580, C.E.P.R. Discussion Papers.
  7. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  8. 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.
  9. Laurence Ball & David Romer, 1987. "Sticky Prices as Coordination Failure," NBER Working Papers 2327, National Bureau of Economic Research, Inc.
  10. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
  11. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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Cited by:
  1. Andersen, Torben M., 2008. "Heterogenous wage formation under a common monetary policy," Economic Modelling, Elsevier, vol. 25(4), pages 740-771, July.
  2. Andersen, Torben M & Spange, Morten, 2002. "International Interdependencies in Fiscal Stabilization Policies," CEPR Discussion Papers 3580, C.E.P.R. Discussion Papers.

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