Why do Small Economies have such Small Wage Differentials?
By: Erling Barth and Karl O. Moene
Nordic Economic Policy Review, vol. 1, 139-170
Open economies have more compressed wages than countries that are less exposed to international competition. This association disappears once we control for population and coordination in wage bargaining. Bargaining coordination compresses wages and reduces non-competitive wage differentials. We argue that competition in the world market induces employers and employees in the export industries to search for ways of controlling wages in the sheltered industries. These mechanisms tend to facilitate cooperation and coordination in countries with high exposure to world markets, leading to a more egalitarian wage distribution in small open economies.