Abstract
SummaryThe efficiency of demand management policies is considered in a two-sector model of a small and open economy with centralized wage bargaining. Differences in labour demand between sectors are shown to have qualitative implications for the responsiveness of wages to changes in output prices. Wage increases induced by increased demand in one sector may, thus, crowd out activity in other sectors, and this has important consequences for the effects of demand management policies on internal and external goals. An often proposed and practised policy of switching demand from tradeables to non-tradeables to ensure internal and external balance is extensively discussed.
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