Are Labour Market Structures Endogenously Dependent on the Monetary Regime? – Empirical Evidence from Denmark 1875-2007

Working paper no 52, 2008

Authors Abildgren, Kim
Subject Danish Economy; Monetary conditions; Inflation, wages and prices; Monetary-policy transmission
Type Working paper
Year 2008
Published 8 April 2008
The historical experience from the past 100 years or so indicates that parts of the labour-market structure in Denmark are endogenously dependent on the monetary regime. A credible monetary regime that delivers on the final target of price stability gives a basis for inflation expectations firmly anchored around price stability, which facilitate the use of multiyear nominal wage contracts and a higher degree of decentralised wage formation among forward-looking workers and employers. Lack of credibility of a monetary regime that results in high and volatile inflation makes shorter wage contracts based on centralised wage bargaining more attractive and encourages the use of inflation indexation of nominal wages. If labour-market structures to some extent are endogenously dependent on the monetary regime, results and policy conclusions from theoretical models that treats these part of the economy as exogenous might be questionable.