Working Paper: NBER ID: w8865
Authors: Steinar Holden
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.
Keywords: No keywords provided
JEL Codes: J5; J6; E31; E52; K31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| downward nominal wage rigidity (J31) | higher unemployment (J64) |
| low inflation (E31) | higher unemployment (J64) |
| institutional framework surrounding wage negotiations (J38) | higher unemployment (J64) |
| nominal wage cuts due to low inflation (E31) | stronger wage pressure from workers (J39) |
| stronger wage pressure from workers (J39) | higher unemployment (J64) |