Wages and Employment

The absence of a strong link between the real wage and labor productivity in some countries can be explained by macro-economic and/or institutional factors. These factors tend to create a wedge between the two variables, thus implying that gains in labor productivity are not fully translated to real wage increases (or vice versa) in the short or the long term. Factors that may have short-term effects are price and wage rigidities and labor adjustment costs. Other factors, which are structural in nature, can have a more protracted effect. Among them are employment protection, entry restrictions, and market regulations. Bargaining power of workers versus firms can also play an important role in weakening the link between labor productivity and real wage (Bentolila and Saint-Paul, 2003).

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