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International Adjustment with Wage Rigidity

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Author Info
William H. Branson
Julio J. Rotemberg

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Abstract

Two of the puzzling macroeconomic phenomena of the 1970s have been the persistent stagnation in Europe, and the disagreement between the U.S. and Europe on the feasibility of recovery by demand expansion. This paper develops the hypothesis that the source of both the stagnation and the policy differences is money-wage stickiness in the U.S. and real-wage stickiness in Europe and Japan. A real wage which is sticky above its equilibrium level in Europe and Japan would account for stagnation and infeasibility of recovery by demand expansion. The theoretical models are developed in both the one-commodity and two-commodity-bundle cases. The empirical results confirm that in the U.S. the nominal wage adjusts slowly toward equilibrium, while in Germany, Italy, Japan, and the U.K. the real wage adjusts slowly.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0406.

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Date of creation: Nov 1979
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Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER.
Handle: RePEc:nbr:nberwo:0406

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