Efficiency wages, disinflation and labor mobility

The paper analyzes the role of labor market segmentation and relative wage rigidity in the transmission process of disinflation policies in an open economy facing imperfect capital markets. Wages are flexible in the nontradables sector, and based on efficiency factors in the tradables sector. With perfect labor mobility, a permanent reduction in the devaluation rate leads in the long run to a real appreciation, a lower ratio of output of tradables to nontradables, an increase in real wages measured in terms of tradables, and a fall in the product wage in the nontradables sector. Under imperfect labor mobility, unemployment temporarily rises.