Monetary Regimes and the Coordination of Wage Setting

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.

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

JEL Classification: E24, J5, E52