Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2005:23: Real and nominal wage adjustment in open economies

Anders Forslund (), Nils Gottfries () and Andreas Westermark
Additional contact information
Anders Forslund: IFAU - Institute for Labour Market Policy Evaluation, Postal: P O Box 513, SE-751 20 Uppsala, Sweden
Nils Gottfries: Department of Economics, Uppsala University, Postal: P O Box 513, SE-751 20 Uppsala, Sweden
Andreas Westermark: Department of Economics, Uppsala University, Postal: P O Box 513, SE-751 20 Uppsala, Sweden

Abstract: How are wages set in an open economy? What role is played by demand pressure, international competition, and structural factors in the labour market? How important is nominal wage rigidity and exchange rate policy for the medium term evolution of real wages and competitiveness? To answer these questions, we formulate a theoretical model of wage bargaining in an open economy and use it to derive a simple wage equation where all parameters have clear economic interpretations. We estimate the wage equation on data for aggregate manufacturing wages in Denmark, Finland, Norway, and Sweden from the mid 1960s to the mid 1990s.

Keywords: Wage formation; efficiency wage; turnover; bargaining; rent sharing; nominal wage rigidity; exchange rate policy; competitiveness

JEL-codes: E52; F33; F41; J31; J51; J63; J64

50 pages, December 5, 2005

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