Nominal Wage Flexibility in a Monetary Union

Mattias Erlandsson
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Mattias Erlandsson: Department of Economics, School of Economics and Commercial Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG

No 80, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Membership in a monetary union reduces the possibilities to counteract fluctuations in productivity by monetary policy. One condition for entrance not to lead to adverse unemployment performance is that wages are flexible with respect to productivity. Here I show that, depending on workers’ risk aversion, the incentive for workers to choose more nominal wages flexibility may increase after entrance in a monetary union. The reason is that if nominal wages are fixed in long-term contracts, the abolishment of exchange rates decreases the risk in real wages. On the other hand, the common monetary policy increases the employment risk. Assuming that individuals’ preferences do not change, the institutional change in monetary policy may increase wage flexibility in a monetary union.

Keywords: New open-economy macroeconomics; Nominal wage flexibility; Optimal wage setting; Monetary unification (search for similar items in EconPapers)
JEL-codes: F41 J30 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2002-09-23
New Economics Papers: this item is included in nep-eec, nep-ifn, nep-lab and nep-ltv
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Citations: View citations in EconPapers (1)

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