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Torben Iversen and David Soskice (2009)
A Political-Institutional Model of Real Exchange Rates, Competitiveness, and the Division of Labor
Unpublished.
This paper addresses three unsolved puzzles in comparative political economy. The first is a purchasing power parity (PPP) puzzle: why do some countries have persistently higher real exchange rates 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 often stellar export performers? The final is a division of labor puzzle: Why do countries at comparable levels of development nevertheless differ notably in terms of the share of workers employed in sectors with different levels of productivity? In this paper we present a simple solution to these puzzles that emphasize how collective wage bargaining 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 are underpinned by distinct partisan political coalitions.
