Wage Dispersion and Country Price Levels

The purpose of this paper was to investigate whether there is a relationship between the degree of wage dispersion in a country and its price level relative to other countries, compared in a common currency. It was found that once a country's real per capita income and deviations of its exchange rate from its trend value are allowed for, there is a pervasive relationship between wage dispersion and prices. Low wage dispersion, defined as a relatively small difference between the median wage and that of the lowest paid decile of workers, is associated with high price levels. The relationship applies more frequently to service prices than to goods prices, but where it does apply, the effects of wage dispersion are as large for goods as for services.