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International Spill-over Effects of Labour Market Rigidities

Author

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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.

Suggested Citation

  • Spange, Morten, "undated". "International Spill-over Effects of Labour Market Rigidities," Economics Working Papers 2003-12, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2003-12
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    File URL: ftp://ftp.econ.au.dk/afn/wp/03/wp03_12.pdf
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    References listed on IDEAS

    as
    1. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, pages 117-153.
    2. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 421-445.
    3. Agell, Jonas, 1999. "On the Benefits from Rigid Labour Markets: Norms, Market Failures, and Social Insurance," Economic Journal, Royal Economic Society, vol. 109(453), pages 143-164, February.
    4. 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, pages 320-352.
    5. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    6. Erlandsson, Mattias, 2002. "Nominal Wage Flexibility in a Monetary Union," Working Papers in Economics 80, University of Gothenburg, Department of Economics.
    7. Benigno, Pierpaolo, 2004. "Optimal monetary policy in a currency area," Journal of International Economics, Elsevier, pages 293-320.
    8. 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.
    9. Ball, Laurence & Romer, David, 1991. "Sticky Prices as Coordination Failure," American Economic Review, American Economic Association, vol. 81(3), pages 539-552, June.
    10. Beetsma, Roel M W J & Schotman, Peter C, 2001. "Measuring Risk Attitudes in a Natural Experiment: Data from the Television Game Show Lingo," Economic Journal, Royal Economic Society, vol. 111(474), pages 821-848, October.
    11. Andersen, Torben M. & Spange, Morten, 2006. "International interdependencies in fiscal stabilization policies," European Economic Review, Elsevier, vol. 50(5), pages 1169-1195, July.
    12. repec:hrv:faseco:34721962 is not listed on IDEAS
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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, 2006. "International interdependencies in fiscal stabilization policies," European Economic Review, Elsevier, vol. 50(5), pages 1169-1195, July.

    More about this item

    Keywords

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

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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