Wage and price control policies in transition economies

Abstract

This paper studies the structural impact of wage and price control policies in transition economies using a two-sector three-factor small open economy model. It illustrates the results quantitatively via simulation exercises. At the earlier stage of the transition when labor is immobile, a strict control on the price of the nontradables and the wage rate minimizes the fall in employment and output. Also, a more severe control on the price of the nontradables than on the wage rate alleviates the fall in the real wage at negligible costs in lost employment and output. At the later stage of the transition when labor becomes mobile, the liberalization of the price of the nontradables can proceed faster than that of the wage rate. This policy combination increases employment and output and reduces the shortage for the nontradables, but lowers the real wage.