International Spill-Over Effects of Labour Market Rigidities

University of Aarhus Economics Working Paper No. 2003-12

40 Pages Posted: 23 Sep 2003

See all articles by Morten Spange

Morten Spange

Aarhus University - Department of Economics and Business Economics

Abstract

This paper analyses the implications of real wage rigidities in a stochastic two-country general equilibrium model. It is shown how real wage rigidities in one country affect welfare in both countries. Assuming that the choice of whether or not to adopt flexible wages is in the hands of labour unions within each country, it is found that wages will be flexible in either no, one or both countries. Hence, even in this symmetric model flexible wages in one country and rigid wages in the other may be an equilibrium. Since there are international spillover effects of the choice of wage setting regime, the utilitarian solution is also considered. Interestingly, this does not necessarily entail more real wage flexibility than in the Nash equilibrium.

Keywords: Real Wage Rigidity, Labour Market Reforms, Spill-over Effects, Open Economy

JEL Classification: E24, E32, F41, F42

Suggested Citation

Spange, Morten, International Spill-Over Effects of Labour Market Rigidities. University of Aarhus Economics Working Paper No. 2003-12, Available at SSRN: https://ssrn.com/abstract=430041 or http://dx.doi.org/10.2139/ssrn.430041

Morten Spange (Contact Author)

Aarhus University - Department of Economics and Business Economics ( email )

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Aarhus V
Denmark
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