The Costs of Price Stability - Downward Nominal Wage Rigidity in Europe

42 Pages Posted: 28 Mar 2002 Last revised: 24 Mar 2022

See all articles by Steinar Holden

Steinar Holden

University of Oslo - Department of Economics; Norges Bank; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: March 2002

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.

Suggested Citation

Holden, Steinar, The Costs of Price Stability - Downward Nominal Wage Rigidity in Europe (March 2002). NBER Working Paper No. w8865, Available at SSRN: https://ssrn.com/abstract=305609

Steinar Holden (Contact Author)

University of Oslo - Department of Economics ( email )

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