An analysis of wage flexibility: evidence from the Spanish regions

The theory of Optimum Currency Areas poses that one of the most important costs that EMU may entail for countries belonging to it is the loss of some instruments of political economy (exchange rate and monetary policies) in response to shocks. The aim of this paper is to analyse real wage flexibility, which is one of the main alternative adjustment mechanisms to these policies. For this purpose, the case of the Spanish regions for the period 1985–1999 is reported. First, we develop a nonparametric approach to show that unemployment and productivity growth rates have reduced effects on wage evolution in the period of study. Second, semiparametric estimation techniques are applied to provide more econometric evidence regarding regional flexibility of real wages in Spain. Additionally, some suggestions are developed on the topic of EMU’s ability to improve the degree of regional wage flexibility. The general conclusion that we draw in the study is that regional wages are very rigid and the impact of EMU, though favourable, will be reduced.

Ignacio Moral-ArceEmail: