Sectorial Wages and the Real Exchange Rate

40 Pages Posted: 29 Jun 2004 Last revised: 5 Jun 2022

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics

Jacob A. Frenkel

Merrill Lynch & Co. - Sovereign Advisory Group and Global Financial Institutions Group; National Bureau of Economic Research (NBER)

Date Written: 1986

Abstract

Consider a multi-sector economy subject to an exogenous demand shock that alters the equilibrium structure of relative prices. How should the structure of sectorial wages adjust in response to such a shock? This question is addressed in the context of a multi-sector model of an open-economy producing internationally tradable and non-tradable goods. In order to focus on intersectorial wage structure without abandoning the competitive neoclassical paradigm we assume that workers differ from each other in their absolute and relative skills. Such differences result in equilibrium wage differentials which are affected by the exogenous real shock. Cost of negotiations result in labor market contracts which set nominal wages in advance of the realization of the stochastic shocks. The analysis provides formulae for the optimal sectorial wage-indexation rules. The optimal rules alter both the absolute and the relative structure of sectorial nominal wages. We examine the dependence of the optimal wage adjustments on the degree of heterogeneity of the skill distribution and on the degree to which the economy is open to international trade; we also study the effects of various shocks and policies on the real exchange rate, real wages and the distribution of income.

Suggested Citation

Aizenman, Joshua and Frenkel, Jacob A., Sectorial Wages and the Real Exchange Rate (1986). NBER Working Paper No. w1801, Available at SSRN: https://ssrn.com/abstract=338841

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Jacob A. Frenkel

Merrill Lynch & Co. - Sovereign Advisory Group and Global Financial Institutions Group

New York, NY
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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