An alternative measure of wage flexibility |
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Authors: | L Goubert E Omey |
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Institution: | (1) University of Gent, Belgium |
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Abstract: | Wage flexibility is usually defined as the responsiveness of wages to market disequilibrium. But market disequilibrium can
be defined in different ways. One can accept a non-Walrasian definition of equilibrium, the market being in equilibrium when
agents have no incentive to change their decisions, even if a change of wages can improve their position. To study the behavior
of wages as an equilibrating variable, it is appropriate to consider Walrasian demand and supply functions, in which wages
are allowed to move in each period in a direction to restore equilibrium between Walrasian demand and supply, even when agents
experience restrictions and take notice of these restrictions when making decisions. The degree of wage flexibility is most
often measured as the amount of equilibrating change that took place in a certain period. In most wage equations wage flexibility
is measured by the coefficient of the unemployment variable, which links the equilibrating change in the wage variable to
the degree of market disequilibrium. The equalization of market disequilibrium with unemployment poses some problems.
The authors wish to thank Freddy Heylen of the University of Gent for helpful comments. |
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