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The Political Economy of the Service Transition$
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Anne Wren

Print publication date: 2013

Print ISBN-13: 9780199657285

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199657285.001.0001

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A Political-Institutional Model of Real Exchange Rates, Competitiveness, and the Division of Labor

A Political-Institutional Model of Real Exchange Rates, Competitiveness, and the Division of Labor

(p.73) 2 A Political-Institutional Model of Real Exchange Rates, Competitiveness, and the Division of Labor
The Political Economy of the Service Transition

Torben Iversen

David Soskice

Oxford University Press

This chapter addresses three related and unsolved puzzles in the political economy literature on advanced economies that are closely related to three central themes for this volume: prices, competitiveness, and employment. The first puzzle concerns prices and is usually referred to purchasing power parity (PPP) puzzle: Why do some countries have persistently higher real exchange rates, or price levels, than others when the law of one price implies convergence? The second is a competitiveness puzzle: Why are those countries with above-average price levels (real exchange rates), many found in continental Europe, nevertheless stellar export performers? The final puzzle is one about employment: Why do countries at comparable levels of overall development and productivity nevertheless differ notably in terms of the share of workers employed in sectors with different levels of skills and productivity (export-oriented manufacturing and low-wage services in particular)? In this chapter we present a simple solution to these puzzles that emphasizes how collective wage bargaining institutions and skill formation systems, by altering the level and dispersion of wages, produce the observed patterns. The solution provides an understanding of cross-national differences in wage equality, employment, and competitiveness, and we show how these differences are underpinned by complementary political coalitions in the labor market and in the political system.

Keywords:   equality, employment, competitiveness, wage bargaining, skill formation, political coalitions, political institutions

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