NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Costs of Price Stability - Downward Nominal Wage Rigidity in Europe

Steinar Holden

NBER Working Paper No. 8865
Issued in March 2002
NBER Program(s):   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w8865

Published: Holden, Steinar. "The Costs Of Price Stability: Downward Nominal Wage Rigidity In Europe," Economica, 2004, v71(281,Feb), 183-208.

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