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Wage Formation in Open Economies and the Role of Monetary and Wage-Setting Institutions



The paper studies the determinants of unemployment in a two-country model, where real wages are the outcome of the strategic interaction between various institutional players (firms, unions, central banks). We show that: (i) the results derived in the recent literature on this topic are not generally robust against the introduction of openness; (ii) the shape of the Calmfors- Driffill curve not only depends on a country’s own centralization of wage-bargaining (CWB) but rather on home and foreign characteristics; (iii) the model challenges the established belief that a shift to a monetary union (MU) will (negatively) affect unemployment in all member countries by fundamentally changing the nature of strategic interactions. Under certain assumptions our open-economy model suggests that the formation of a MU has no effect whatsoever on structural unemployment.

Suggested Citation

  • Markus Knell, 2002. "Wage Formation in Open Economies and the Role of Monetary and Wage-Setting Institutions," Working Papers 63, Oesterreichische Nationalbank (Austrian Central Bank).
  • Handle: RePEc:onb:oenbwp:63

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    References listed on IDEAS

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    Cited by:

    1. Bratsiotis, George J., 2008. "Influential price and wage setters, monetary policy and real effects," European Journal of Political Economy, Elsevier, vol. 24(2), pages 503-517, June.
    2. Hochreiter, Eduard & Schmidt-Hebbel, Klaus & Winckler, Georg, 2002. "Monetary union: European lessons, Latin American prospects," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 297-321, December.
    3. Markus Knell, 2002. "The effects of EMU on euro area unemployment," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(3), pages 244-262, September.
    4. Carsten Hefeker, 2002. "Lohnpolitik und Geldpolitik in Euroland," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 71(3), pages 354-367.
    5. Wenlang Zhang & Gaofeng Han, 2013. "How have Labour Market Developments Affected Labour Costs in China?," Working Papers 072013, Hong Kong Institute for Monetary Research.
    6. Peter Mooslechner & Martin Schürz, 2001. "The Interaction of Wage Bargaining Institutions and an Independent Central Bank – A Methodological Reflection on Current Theories," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 28(4), pages 487-506, December.

    More about this item


    Wage-Setting; Unemployment; Monetary Union;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • 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
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects


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