Lessons of the Wage Dynamics Network

Grégory de Walque, M. Druant, Philip Du Caju and Catherine Fuss
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M. Druant: National Bank of Belgium, Research Department

Economic Review, 2010, issue i, 55-75

Abstract: The Wage Dynamics Network (WDN) is a temporary research network with the main objective of identifying the characteristics of wage dynamics and drawing conclusions from them in monetary policy terms. The paper presents the main findings of this research work. Notably, the intersectoral wage differential can be partly attributed to differences in profitability and the degree of competition to which the sectors are exposed. Nominal wages are adjusted less frequently than prices and adjustments generally tend to be made at regular intervals rather than in response to the economic climate. Wage rigidity not only affects existing workers, but also new recruits. The euro area, and Belgium in particular, is marked more by rigid real wages than nominal wages. Real wage rigidity implies a low optimal inflation rate and tends to complicate the conduct of monetary policy since it triggers greater fluctuations in output and employment and makes inflation more persistent. Furthermore, in a monetary union, countries with higher real wage rigidity suffer a loss of competitiveness in the event of negative productivity shocks. Institutions underlying wagesetting generally play an important role in the way in which firms and economies react to shocks. The heterogeneity of these institutions within the euro area therefore presents a real challenge for monetary policy.

Keywords: firms’ behavior; wage rigidity; employment; monetary policy; labour market flexibility; labour market institutions; economic shocks (search for similar items in EconPapers)
JEL-codes: D21 J30 J31 J60 (search for similar items in EconPapers)
Date: 2010
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