Open AccessNominal Wage Flexibility, Wage Indexation and Monetary Union *
Author(s) -
Calmfors Lars,
Johansson Åsa
Publication year - 2006
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/j.1468-0297.2006.01057.x
Subject(s) - indexation , wage , economics , flexibility (engineering) , political science , monetary policy , labour economics , monetary economics , management
Membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non‐membership. This counteracts the stabilisation policy cost of giving up monetary independence. But more wage flexibility is only an imperfect substitute for an individual monetary policy. It is possible that an increase in wage flexibility is welfare‐decreasing because of the accompanying rise in price variability. The interaction between wage setting and central bank behaviour may result in either multiple equilibria or a unique full‐indexation equilibrium.