Three Symptoms and a Cure : A Contribution to the Economics of the Dutch Disease

This paper extends the literature on the Dutch disease by showing how natural resources can reduce secondary-sector employment and investment through channels involving labor-market externalities and exchange-rate volatility. We then look at data from Iceland - which is one of few OECD countries that may have a serious problem of this sort - and look for evidence supporting our hypotheses. We find a clear effect of primary sector output and its volatility on real wages. Moreover, high real wages are shown to impede investment and employment in the secondary sector