On Wage Formation, Wage Development and Unemployment - The Case of Ireland, Spain and the Netherlands

Abstract

In the mid ninetees unemployment substantially decreased in some EMU-countries, notably in Ireland, Spain and the Netherlands. One important factor underlying this development is wage moderation. This paper investigates wage formation and wage development. Using a theoretical wage bargaining model main determinants of formation are described, a non-linear wage equation is derived and estimated with annual or quarterly data of the Netherlands, Spain and Ireland. The effects of the individual determinants on wages are calculated and, in addition, each determinant’s contribution to the total wage developments is analysed over the last three decades. It follows that each decade is characterised by few dominating determinants. The contribution of unemployment has altered considerably.

Keywords: wage formation, wage development, unemployment, prices, replacement rate, productivity

JEL Classification: C22, E24, J30