Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2005:18: Real and Nominal Wage Adjustment in Open Economies

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

Abstract: A wage equation for a small open economy is derived and estimated on aggregate data for the Nordic countries. The equation is derived from a model of wage bargaining over nominal wages; hence both long run coefficients and adjustment parameters have clear economic interpretations. Wages depend on the scope (main course) for wage increases; based on our theoretical model we interpret this as evidence of union bargaining power. Unemployment benefits have substantial effects on wages in all four countries. There is substantial nominal wage rigidity; hence changes in exchange rates have large and persistent effects on competitiveness.

Keywords: wage formation; bargaining; rent sharing; turnover; search; exchange rate policy; wage equation; wage rigidity; competitiveness

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

49 pages, June 12, 2005

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