The effect of wage restraint on labour market flows

The effects are studied of a wage restraint policy on flows in the labour market. Flows into and out of employment are distinguished and simple models are considered for these flows. Wage costs, in particular, are found to affect the flow of employment into unemployment, which can be considered as a measure of job destruction, but wage costs have no effect on the number of new hires, which can be considered as a measure of job creation. Therefore, wage moderation has preserved jobs that would otherwise have been destroyed. The inflow of new hires is influenced by investments, the generosity of the social benefit system and by structural mismatch. Apart from wage costs, interest costs of firms also play a role in the job destruction process, particularly since the beginning of the 1980s.