On Wage Formation, Wage Development and Flexibility: A Comparison between European Countries and the United States

Abstract

For Germany, Spain, France, the Netherlands and the US an Error Correction Model with a long-term non-linear wage equation is estimated by 3-SLS to obtain consistent estimates, accounting for endogeneity and common shocks. On the basis of the estimated parameter elasticities of wages with respect to labour productivity, value added and consumer prices, taxes, unemployment and replacement rates are computed along with the wage contributions. The results indicate that the dominant role of prices in the formation of wages in the seventies and eighties was taken over by labour productivity in the US and unemployment in Spain and - almost- in the Netherlands at the end of the nineties. Evidence for a stronger real wage flexibility of the US in comparison with the four European countries is not found.

Keywords: wage flexibility, labour market

JEL Classification: C22, E24, J30