American Economic Review Vol. 106 No. 12 2016
Understanding the Gains from Wage Flexibility: The Exchange Rate Connection
open access
Abstract
We study the gains from increased wage flexibility using a small open economy model with staggered price and wage setting. Two results stand out: (i) the effectiveness of labor cost reductions as a means to stimulate employment is much smaller in a currency union, and (ii) an increase in wage flexibility often reduces welfare, more likely so in an economy that is part of a currency union or with an exchange-rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union.
- DOI
- 10.1257/aer.20131658
- Volume
- 106
- Issue
- 12
- Pages
- 3829-3868
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref