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Linking wages to changing output prices : an empirical study of 13 industrial countries

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  • Prywes, Menahem

Abstract

A shock that lowers profits depresses employment less when wages are flexible in terms of the value-added output price. This kind of flexibility allows a country to remain competitive in world markets when a shock to profits lowers its value-added output price. In many countries, wages are indexed to consumer prices, thus protecting the real income of workers in the short run. Some industrial countries link wages more closely to the value-added output price. Estimates of the elasticity of wages in terms of the value-added output price are high, significant, and of a theoretically plausible magnitude in three industrial countries that perform well in world markets: Japan, Germany, and Switzerland. The ouput price elasticity of wages also appears high in two industrial countries that produce primary products: Canada and Australia. This may reflect the difficulty of passing wage increases on to higher commodity prices. Wage flexibility may be particularly important for developing countries exporting primary products.

Suggested Citation

  • Prywes, Menahem, 1989. "Linking wages to changing output prices : an empirical study of 13 industrial countries," Policy Research Working Paper Series 187, The World Bank.
    • Handle: RePEc:wbk:wbrwps:187
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    References listed on IDEAS

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