Prices, Productivity, and Wage Bargaining in Open Economies

According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product market conditions together determine wages. A wage equation is derived and estimated on aggregate data for the Nordic countries. Wages are found to depend on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.This is a revised version of "Real and nominal wage adjustment in open economies", Working paper / Department of Economics, Uppsala University (Online), ISSN 1653-6975; 2005:18. (http://urn.kb.se/resolve?urn=urn:nbn:se:uu:diva-79328)