Unemployment and the open economy wage‐price spiral

We present a dynamic model of real wages in the open economy that encapsulates the well‐known “competing claims model” or “incomplete competition model” of real wage determination. In general, the model determines the development of inflation, real wages and the real exchange rate for any given rate of unemployment. Inflation, rather than unemployment, is the “conflict solver” in the unrestricted model. However, a supply side determined equilibrium rate of unemployment is subsumed as a special case. A re‐appraisal of the empirical literature shows that there is little evidence in support of the “natural rate” restrictions.