WAGE DYNAMICS IN ISRAEL - MARKET FORCES AND SPILLOVER EFFECTS

The path of real wages in Israel since the July 1985 stabilization programme - an initial decline followed by excessive wage increases - is not fully explained by macroeconomic variables. The interaction of wage changes across industries is shown to play a key role in the development of average wages: exogenous shocks affect industries unevenly, setting off a short-run wage-comparison process between the different industries. These dynamics act in combination with longer-run competitive forces, while in the very long run the wage system converges to a stable structure. One implication of the analysis is that excessive restraint of the uniform nation-wide wage component may in fact lead to higher overall wage increases. It also helps to explain the persistence of the post-stabilization rate of inflation.