Inflation, Employment, and the Dutch Disease in Oil-Exporting Countries: A Short-Run Disequilibrium Analysis

We explain nontraded goods and labor shortages in the Gulf countries, the decline of the traded goods sector in oil producers (“Dutch Disease”), and the absence of employment benefits of higher oil revenues in Latin American oil producers using a disequilibrium model where real wages and the real exchange rate adjust slowly to clear the labor and nontraded goods market. Higher oil revenues can be likened to a transfer putting pressure on NT goods prices and drawing resources out of the T sector. The slope of the wage indexation line determines whether classical unemployment or repressed inflation results. Various policy measures are analyzed.