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Abstract:
The role of demand management policy is considered in a two-sector open economy model with price-taking firms and imperfect competition in the labor market. Demand management policies are shown to affect the equilibrium distribution of prices and hence output in the case of both supply (productivity) and demand (preferences) shocks. As agents are risk-averse, there is a welfare case for pursuing an active stabilization policy, and the optimal fiscal policy as well as the possibility of implementing this via automatic budget rules are discussed.

Abstract:
How do the complex institutions involved in wage setting affect wage changes? The International Wage Flexibility Project provides new microeconomic evidence on how wages change for continuing workers. We analyze individuals' earnings in 31 different data sets from sixteen countries, from which we obtain a total of 360 wage change distributions. We find a remarkable amount of variation in wage changes across workers. Wage changes have a notably non-normal distribution; they are tightly clustered around the median and also have many extreme values. Furthermore, nearly all countries show asymmetry in their wage distributions below the median. Indeed, we find evidence of both downward nominal and real wage rigidities. We also find that the extent of both these rigidities varies substantially across countries. Our results suggest that variations in the extent of union presence in wage bargaining play a role in explaining differing degrees of rigidities among countries.

wage setting, wage change distributions, downward nominal wage rigidity, downward real wage rigidity

Abstract:
How do the complex institutions involved in wage setting affect wage changes? The International Wage Flexibility Project provides new microeconomic evidence on how wages change for continuing workers. We analyze individuals' earnings in 31 different data sets from sixteen countries, from which we obtain a total of 360 wage change distributions. We find a remarkable amount of variation in wage changes across workers. Wage changes have a notably non-normal distribution; they are tightly clustered around the median and also have many extreme values. Furthermore, nearly all countries show asymmetry in their wage distributions below the median. Indeed, we find evidence of both downward nominal and real wage rigidities. We also find that the extent of both these rigidities varies substantially across countries. Our results suggest that variations in the extent of union presence in wage bargaining play a role in explaining differing degrees of rigidities among countries.

Wage setting, Wage change distributions, Downward nominal wage rigidity, Downward real wage rigidity

Abstract:
Recent micro studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries, but the effect on aggregate variables remains disputed. Using data for hourly nominal wages, we explore the existence of DNWR on wages at the industry level in 19 OECD countries, over the period 1973-1999. Based on a novel method, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 61 percent in the 1970s to 16 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when unemployment is low, union density is high, and employment protection legislation is strict.

Downward nominal wage rigidity, oecd, employment protection legislation, wage setting

Abstract:
Recent micro studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries, but the effect on aggregate variables remains disputed. Using data for hourly nominal wages, we explore the existence of DNWR on wages at the industry level in 19 OECD countries, over the period 1973-1999. Based on a novel method, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 61 percent in the 1970s to 16 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when unemployment is low, union density is high, and employment protection legislation is strict.

Downward nominal wage rigidity, OECD, employment protection legislation, wage setting

Abstract:
What is the role of "large players" like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are in the rear. We propose a model that allows both the large player to move early in order to induce speculation by small players, or wait so as to benefit from a high interest rate prior to the attack. Using data on net positions of "large" (foreigners) and "small" (locals) players, we find that large players moved last in three attacks on the Norwegian krone (nok) during the 1990s: The ERM-crisis of 1992, the NOK-pressure in 1997, and after the Russian moratorium in 1998. In 1998 there was a contemporaneous attack on the Swedish krona (sek) in which large players moved early. Interest rates did not increase in Sweden so there was little to gain by a delayed attack.

speculative attacks, microstructure, international finance, large players

Abstract:
What is the role of "large players" like hedge funds and other highly leveraged institutions in speculative attacks? In recent theoretical work, large players may induce an attack by an early move, providing information to smaller agents. In contrast, many observers argue that large players are in the rear. We propose a model that allows both the large player to move early in order to induce speculation by small players, or wait so as to benefit from a high interest rate prior to the attack. Using data on net positions of "large" (foreigners) and "small" (locals) players, we find that large players moved last in three attacks on the Norwegian krone (NOK) during the 1990s: The ERM-crisis of 1992, the NOK-pressure in 1997, and after the Russian moratorium in 1998. In 1998 there was a contemporaneous attack on the Swedish krona (SEK) in which large players moved early. Interest rates did not increase in Sweden so there was little to gain by a delayed attack.

Speculative attacks, microstructure, international finance, large players

Abstract:
In an economy with large wage setters (like industry unions), the monetary regime affects the trade-off between consumer real wages and employment and profits faced by the wage setters. This paper shows that an exchange rate target, including participation in a monetary union, is likely to involve lower wages in the traded sector, and higher wages in the non-traded sector, than does a price target. An exchange rate target also involves higher prices on non-traded goods relative to traded goods. Overall welfare is likely to be higher under a price target.

Wage Bargaining, Monetary Union, Inflation Target, Monetary Regime, Equilibrium Unemployment

Abstract:
In most European countries, money wages are given in collective agreements or individual employment contracts, and the employer cannot unilaterally cut wages, even after the expiration of a collective agreement. Ceteris paribus, workers have a stronger bargaining position when they try to prevent a cut in money wages. If inflation is so low that some money wages have to be cut, workers' stronger bargaining position requires higher unemployment in equilibrium. However, inflation is more stable when money wage rigidity binds, providing an incentive for monetary policy makers to choose a low target for inflation, which is easier to fulfil.

Nominal Wage Rigidity, Labour Contracts, Monetary Policy, Inflation, Equilibrium Unemployment

Abstract:
This paper reviews the literature on the effects of low steady-state inflation on wage formation, focusing on four different effects. First, under low inflation, downward nominal wage rigidity (DNWR) may prevent real wage cuts that would have happened had inflation been higher. Second, wages (and prices) are given in nominal contracts, and inflation affects both how often wages are adjusted, and to what extent wages are set in a forward-looking manner. Third, incomplete labour contracts may provide workers with scope for inflicting costs on the firm without violating the contract, thus forcing the firm to accept a rise in nominal wages. Fourth, if effort depends on wages relative to a reference level, and workers and firms underweight inflation when updating the reference level, positive but moderate inflation may reduce wage pressure. The paper ends by a brief survey of empirical evidence, and a discussion of whether labour markets may adapt to a low inflation environment.

wage formation, nominal contracts, inflation

Abstract:
This paper explores the existence of downward nominal wage rigidity (DNWR) in the industry sectors of 14 European countries, over the period 1973-1999, using a data set of hourly nominal wages at industry level. Based on a novel nonparametric statistical method, which allows for country and year-specific variation in both the median and the dispersion of industry wage changes, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 70 percent in the 1970s to 20 percent in the 1990s, but the number of industries affected by DNWR has increased. Wage cuts are less likely in countries and years with high inflation, low unemployment, high union density and strict employment protection legislation.

downward nominal wage rigidity, European countries, employment protection legislation

Abstract:
International comparisons show that countries with coordinated wage setting generally have lower unemployment than countries with less coordinated wage setting. This paper argues that the monetary regime may affect whether coordination among many wage setters is feasible. A strict monetary regime, like a country-specific inflation target, to some extent disciplines wage setters, so that the consequences of uncoordinated wage setting are less detrimental than under a more passive monetary regime (e.g., a monetary union). Thus, the gains from coordination are larger under a passive regime. Under some circumstances a passive regime may induce cooperation in wage setting, and thus lower unemployment, when a stricter regime would not.

Wage Setting, Coordination, Equilibrium Unemployment, Monetary Regime, Monetary Union, Wage Moderation

Abstract:
This paper explores the existence of downward real wage rigidity (DRWR) in 19 OECD countries, over the period 1973-1999, using data for hourly nominal earnings at industry level. Based on a nonparametric statistical method, which allows for country and year specific variation in both the median and the dispersion of industry wage changes, we find evidence of some downward rigidity of real wages in OECD countries overall, as well as for regions and time periods. There is some evidence that real wage cuts are less prevalent under strict employment protection legislation and high union density. Generally, we find stronger evidence for downward nominal than for downward real wage rigidity.

downward real wage rigidity, OECD, employment protection legislation, wage setting

Abstract:
Consider a contract over trade in continuous time between two players, according to which one player makes a payment to the other in exchange for an exogenous service. At each point in time, either player may unilaterally require an adjustment to the contract payment, involving adjustment costs for both players. Players' payoffs from trade under the contract, as well as from trade under an adjusted contract, are exogenous and stochastic. We consider players' choice of whether and when to adjust the contract payment. It is argued that the optimal strategy for each player is to adjust the contract whenever the contract payment relative to the outcome of an adjustment passes a certain threshold, depending among other things on the adjustment costs. There is strategic substitutability in the choice of thresholds, so that if one player becomes more aggressive by choosing a threshold closer to unity, the other player becomes more passive. If players may invest in order to reduce the adjustment costs, there will be over-investment compared to the welfare-maximizing levels.

Abstract:
Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that one of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model, is highly problematic. Fuhrer and Moore's 1995 formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence.

Inflation persistence

Abstract:
Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that one of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model, is highly problematic. Fuhrer and Moore's 1995 formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence.

Inflation persistence

Abstract:
Within a simple formal model, we show that there is a link between workers' consumption patterns and their preferred real wage. A large budget share of illiquid durable consumption goods (such as houses and cars) makes workers more willing to accept a low wage in order to reduce the probability of unemployment, but less willing to lower the real wage if labor demand unexpectedly falls. Moreover, as long as durable consumption goods are financed through imperfectly indexed credit, the budget share of illiquid durable goods affects the impact of inflation on the real wage. These predictions are confronted with data from sixteen OECD countries. We find that high household indebtedness lowers the natural rate of unemployment and increases real and nominal wage rigidity.

Abstract:
We provide a new explanation for why firms pay for general training in a competitive labor market. If firms are unable to tailor individual wages to ability, for informational or institutional reasons, they will pay for general training in order to attract better quality workers. The market provision of training may well exceed the first best level. Our explanation relies on wage compression within skill categories, while imperfect competition based explanations for firm subsidised general training rely on wage compression across skill categories.

Abstract:
Most wage-contracting models with rational expectations fail to replicate the persistence in inflation observed in the data. We argue that coordination problems and multiple equilibria are the keys to explaining inflation persistence. We develop a wage-contracting model in which workers are concerned about being treated fairly. This model generates a continuum of equilibria (consistent with a range for the rate of unemployment), where workers want to match the wage set by other workers. If workers' expectations are based on the past behavior of wage growth, these beliefs will be self-fulfilling and thus rational. Based on quarterly U.S. data over the period 1955-2000, we find evidence that inflation is more persistent between unemployment rates of 4.7 and 6.5 percent, than outside these bounds, as predicted by our model.

Inflation persistence, coordination problems, adaptive expectations

Abstract:
Most wage-contracting models with rational expectations fail to replicate the persistence in inflation observed in the data. We argue that coordination problems and multiple equilibria are the keys to explaining inflation persistence. We develop a wage-contracting model in which workers are concerned about being treated fairly. This model generates a continuum of equilibria (consistent with a range for the rate of unemployment), where workers want to match the wage set by other workers. If workers' expectations are based on the past behavior of wage growth, these beliefs will be self-fulfilling and thus rational. Based on quarterly U.S. data over the period 1955-2000, we find evidence that inflation is more persistent between unemployment rates of 4.7 and 6.5 percent, than outside these bounds, as predicted by our model.

Abstract:
This paper explores the existence of downward real wage rigidity (DRWR) in 19 OECD countries, over the period 1973-1999, using data for hourly nominal earnings at the industry level. Based on a nonparametric statistical method, which allows for country- and year-specific variation in both the median and the dispersion of industry wage changes, we find evidence of some DRWR in OECD countries overall, as well as for specific geographical regions and time periods. There is some evidence that real wage cuts are less prevalent in countries with strict employment protection legislation and high union density. Generally, we find stronger evidence for downward nominal wage rigidity than for downward real wage rigidity.

Abstract:
International comparisons show that countries with co-ordinated wage setting generally have lower unemployment than countries with less co-ordinated wage setting. This paper argues that the monetary regime may affect whether co-ordination among many wage setters is feasible. A strict monetary regime, like a country-specific inflation target, to some extent disciplines wage setters, so that the consequences of uncoordinated wage setting are less detrimental than under a more passive monetary regime (eg a monetary union). Thus, the gains from co-ordination are larger under a passive regime. Under some circumstances a passive regime may induce co-operation in wage setting, and thus lower unemployment, when a stricter regime would not.

Abstract:
No abstract available.

Abstract:
A number of recent studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries. However, DNWR for individual workers may induce downward rigidity or "a floor" for the aggregate wage growth at positive or negative levels. Aggregate wage growth may be below zero because of compositional effects, for example that old, high-wage workers are replaced by young low-wage workers. DNWR may also lead to a positive growth in aggregate wages because of changes in relative wages. We explore industry data for 19 OECD countries, over the period 1971-2006. We find evidence for floors on nominal wage growth at 6 percent and lower in the 1970s and 1980s, at one percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that DNWR is stronger in country-years with strict employment protection legislation, high union density, centralised wage setting and high inflation.

wage inflation, downward nominal wage rigidity, OECD, wage setting

Abstract:
The non-accelerating wage rate of unemployment (NAWRU indicator), used by the OECD as a measure of structural unemployment, has risen for the four Nordic countries Denmark, Finland, Norway and Sweden. In this paper we present stable empirical wage equations for the same countries over the period 1964-1994, in sharp contrast to the increased NAWRU estimates. The instability of the NAWRU estimates is an artefact of a misspecified underlying wage equation, and not due to instability in wage setting itself.

Abstract:
No Abstract Available

Abstract:
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.

Abstract:
Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that two of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model and the Blanchard and Katz (1999) reservation wage conjecture, are highly problematic. Fuhrer and Moore (1995)'s formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence. The Blanchard and Katz conjecture turns out to imply that inflation depends negatively on itself lagged, i.e. the opposite of the empirical regularity.

Abstract:
A number of recent studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries. However, dnwr for individual workers may induce downward rigidity or “a floor” for the aggregate wage growth at positive or negative levels. Aggregate wage growth may be below zero because of compositional effects, for example that old, high-wage workers are replaced by young low-wage workers. DNWR may also lead to a positive growth in aggregate wages because of changes in relative wages. We explore industry data for 19 OECD countries, over the period 1971-2006. We find evidence for floors on nominal wage growth at 6 percent and lower in the 1970s and 1980s, at one percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that DNWR is stronger in country-years with strict employment protection legislation, high union density, centralised wage setting and high inflation.

wage inflation, downward nominal wage rigidity, OECD, wage setting

Abstract:
No abstract available.

Abstract:
In most European countries, the prevailing terms of employment, including the nominal wage, can be changed only by mutual consent. This legal feature gives workers a strategic advantage in wage negotiations when employers push for a nominal wage cut. The upshot is a long-run trade-off between inflation and unemployment for low levels of inflation, in spite of all agents being rational and with no expectational errors. Specifically, downward nominal wage rigidity and excess unemployment at zero inflation are related to three factors: the coverage of collective agreements, the legal framework at contract renewal, and the strictness of the employment protection legislation for non-union workers.

Abstract:
We study a search model with employment protection legislation. We show that if the output from the match is uncertain ex ante, there may exist a discriminatory equilibrium where workers with the same productive characteristics are subject to different hiring standards. If a bad match takes place, discriminated workers will use longer time to find another job, prolonging the costly period for the firm. This makes it less profitable for the firms to hire the discriminated workers, thus sustaining discrimination. In contrast to standard models, the existence of employers with a taste for discrimination may make it more profitable to discriminate also for firms without discriminatory preferences.

Discrimination, Employment Protection, Hiring Standards

Abstract:
The scope for an active demand management policy is considered for a small open economy. Business cycle fluctuations generated either by supply or demand shocks are shown to imply welfare losses when agents are risk averse and the capital market imcomplete. Public demand for non-tradeables has real effects and there is a welfare case for pursuing a demand management policy which stabilizes consumption. It is argued that this type of stabilization can be attained via automatic stabilizers based on nominal budgeting rules.

Abstract:
In a longterm relationship between two parties, one party's threat of a unilateral violation of an initial contract may induce a renegotiation of the contract. As a renegotiation may result in one party capturing some of the return from the other's investments, this possibility may lead to underinvestment. I show that if there is uncertainty associated with the outcome of a renegotiation, and if players are risk averse, there will be an interval for the initial contract so that it is not renegotiated. By an appropriate choice of the initial contract, underinvestment can thus be avoided.

Abstract:
The paper suggests a channel through which past expectations affect current wage aspirations, leading to real wage rigidity. Expectations have a long-run impact on the composition of consumption because they determine the purchase of durables. Due to adjustment costs, moderate changes in income are absorbed by non-durable consumption only. We show that when labour demand is unexpectedly low, workers are risk seeking; they prefer a risk of becoming unemployed to a substantial reduction of the real wage. Conversely, they show moderation when labour demand is unexpectedly high.