Wage Bargaining, Inequality, and the Dutch Disease

Publication: Scientific journalJournal articlepeer-review

Abstract

The theory of the “Dutch Disease” predicts that income from oil and other natural resources produces negative economic consequences through two different mechanisms. The “Resource Movement Effect” suggests that workers leave manufacturing for higher-paying jobs in other sectors. The “Spending Effect” implies that spending resource wealth domestically leads to exchange rate appreciation. The combination of these processes results in the contraction of the export sector. This article explores how, and why, a country’s institutions may prevent the Dutch Disease before it starts. Incorporating insights from the “Varieties of Capitalism” literature, I find that the Dutch Disease is significantly less severe in countries with a high degree of wage bargaining coordination and with low income inequality. The former interrupts the Resource Movement Effect as it limits workers’ incentives to move out of the tradable sector. The latter moderates the Spending Effect because it prevents appreciation of the real exchange rate.
Original languageEnglish
Pages (from-to)677 - 692
JournalInternational Studies Quarterly
Volume60
Issue number4
DOIs
Publication statusPublished - 2016
Externally publishedYes

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502027 Political economy

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