Wage‐setting under Different Monetary Regimes

Abstract

In an economy with large wage‐setters (like industry unions), the monetary regime affects the trade‐off between consumer real wages and employment and profits faced by the wage‐setters. This paper shows that an exchange rate target, including participation in a monetary union, is likely to involve lower wages in the traded sector, and higher wages in the non‐traded sector, than does a price target. An exchange rate target also involves higher prices on non‐traded goods relative to on traded goods. Overall welfare is likely to be higher under a price target.