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The Costs of Price Stability - Downward Nominal Wage Rigidity in Europe

  • Steinar Holden

In most European countries, the prevailing terms of employment, including the nominal wage, can only be changed by mutual consent. I show that this feature implies that workers have a strategic advantage in the wage negotiations when they try to prevent a cut in nominal wages. If inflation is so low that some nominal wages have to be cut, the strategic advantage of the workers' induces higher unemployment in equilibrium. The upshot is a long run tradeoff between inflation and unemployment for low levels of inflation. The prediction that low inflation involves higher unemployment in Europe but not in the US, is consistent with previous empirical findings.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8865.

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Date of creation: Mar 2002
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Publication status: published as Holden, Steinar. "The Costs Of Price Stability: Downward Nominal Wage Rigidity In Europe," Economica, 2004, v71(281,Feb), 183-208.
Handle: RePEc:nbr:nberwo:8865
Note: EFG ME
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