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Nominal Wage Flexibility in a Monetary Union

  • Erlandsson, Mattias

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

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    Membership in a monetary union reduces the possibilities to counteract fluctuations in productivity by monetary policy. One condition for entrance not to lead to adverse unemployment performance is that wages are flexible with respect to productivity. Here I show that, depending on workers’ risk aversion, the incentive for workers to choose more nominal wages flexibility may increase after entrance in a monetary union. The reason is that if nominal wages are fixed in long-term contracts, the abolishment of exchange rates decreases the risk in real wages. On the other hand, the common monetary policy increases the employment risk. Assuming that individuals’ preferences do not change, the institutional change in monetary policy may increase wage flexibility in a monetary union.

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    File URL: http://hdl.handle.net/2077/2862
    Download Restriction: no

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 80.

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    Length: 37 pages
    Date of creation: 23 Sep 2002
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0080
    Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/

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    1. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Orientated National Monetary Rules," CEPR Discussion Papers 2856, C.E.P.R. Discussion Papers.
    2. Gilles Saint Paul & Samuel Bentolila, 2000. "Will EMU increase eurosclerosis?," Economics Working Papers 449, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
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