Short-Run Wage Flexibility and Labour Market Adaptation in Western Europe

ABSTRACT: This paper starts by reviewing some of the evidence relating to movements in relative wages, asking what have been their causes and whether they serve to allocate labour across labour markets. Much of the research has tended to focus on the statistical sources available, and therefore to focus on movements of pay between industries rather than firms, between occupations, and between workers with different levels of qualification. This has greatly constrained the possibility of linking these different dimensions to look at the ideal question, namely to what extent do relative wages respond to labour supply and demand pressures, and to what extent do they help to reconcile these two pressures. In addition, evidence from studies based on data obtained from individual firms also broadly supports the view that wage differentials are not very responsive to supply and demand pressures, and also that they are mostly not very effective in promoting the adaptation of labour supply and demand across labour markets. The paper ends by considering briefly some recent policy ideas for increasing the responsiveness of relative wages to demand changes.