Wage drift and the relevance of centralised wage setting

The system of wage setting in the Nordic countries is often regarded as hig hly centralised, contributing to considerable real wage flexibility. This v iew has been questioned, as sizeable wage drift may offset the effect of ce ntral negotiations. This paper presents evidence from the four major Nordic countries, suggesting that there is little or no such offsetting effect. Y et, at central negotiations, the institutional system of wage formation may induce nominal rigidities that may prevent wage restraint when there is li ttle room for money wage growth. Empirical evidence supports the existence of nominal rigidity.