Real Wages, The Wage Share and Cumulative Wage Indexation following a Currency Devaluation

M.J. Watts
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M.J. Watts: Monash University, Melbourne, VIC

Economic Analysis and Policy, 1988, vol. 18, issue 1, 27-42

Abstract: Real wage maintenance is shown to be incompatible with a currency devaluation in an N sector model in which production requires imported raw materials. Irrespective of the type of economy and the first round response of price setters the competitive advantage of the devaluation is dissipated, under constant markups, in the long run by the ensuing (convergent) wage price adjustment process. Wage adjustment designed to maintain income shares has the same asymptotic properties. In an economy with both competitive and imperfectly competitive sectors, the devaluation operates unevenly. Hence such a shock imposes significant pressures on a centralised wage fixation system.

Date: 1988
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