High Wage Growth under Stable Dollar Exchange Rates

Ronald I. McKinnon

in The Unloved Dollar Standard

Published in print December 2012 | ISBN: 9780199937004
Published online January 2013 | e-ISBN: 9780199980703 | DOI:
High Wage Growth under Stable Dollar Exchange Rates

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In balancing international competitiveness for a high productivity growth economy, wage increases and currency appreciation are substitutes. From the Scandinavian model of wage adjustment and inflation, high wage growth in tradables (manufacturing) industries more or less matches productivity growth when the exchange rate is fixed. This high wage growth creates inflation in the nontradable (service) sectors, where productivity growth is lower. Nevertheless, international competitiveness in the tradables sector can remain balanced without exchange rate changes—as shown by evidence from Japan and later China. However, if the high-growth economy is forced to appreciate its currency, and expectations of further appreciation become embedded in labor bargaining, then wage growth falls below productivity growth in its manufacturing sector. As in Japan in the 1980s and 1990s, deflation with falling prices and interest rates compressed toward zero sets in—possibly with several “lost decades”. China bashers beware!

Keywords: international competitiveness; high growth; wage flexibility; forced appreciation; deflation

Chapter.  2776 words.  Illustrated.

Subjects: Financial Markets

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