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Nominal Wage Flexibility in a Monetary Union

Author

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  • Erlandsson, Mattias

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

Abstract

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.

Suggested Citation

  • Erlandsson, Mattias, 2002. "Nominal Wage Flexibility in a Monetary Union," Working Papers in Economics 80, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0080
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    File URL: http://hdl.handle.net/2077/2862
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    References listed on IDEAS

    as
    1. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
    2. Maurice Obstfeld & Kenneth Rogoff, 2002. "Global Implications of Self-Oriented National Monetary Rules," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 503-535.
    3. Gilles Saint Paul & Samuel Bentolila, 2000. "Will EMU increase eurosclerosis?," Economics Working Papers 449, Department of Economics and Business, Universitat Pompeu Fabra.
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    Cited by:

    1. Spange, Morten, 2008. "International spill-over effects of labour market rigidities," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 157-178, March.

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    More about this item

    Keywords

    New open-economy macroeconomics; Nominal wage flexibility; Optimal wage setting; Monetary unification;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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