The Balassa-Samuelson Effect and the Wage, Price and Unemployment Dynamics in Spain

Katarina Juselius and Javier Ordóñez ()

No 05-29, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper provides an empirical investigation of the wage, price and unemployment dynamics that have taken place in Spain during the last two decades. The aim of this paper is to shed some light on the impact of the European economic integration process on Spanish labour market and the convergence to a European level of prosperity. We find some important lessons to be learnt from the Spanish experience that should be relevant for the new member states. First, high competitiveness in the tradable sector seems crucial for the real and nominal convergence to be successful, implying that the increase of wages in the tradable sector, and subsequently in the nontradable sector, should not be allowed to exceed the growth in productivity. Second, before fixing the real exchange rate it seems crucial that it is on its sustainable (competitive) purchasing power parity level. A real appreciation, as a result of high growth rates during the catching-up period, is likely to be harmful for real growth and employment.

Keywords: Balassa-Samuelson effect; nominal and real convergence; unemployment dynamics; purchasing power parity; cointegrated VAR (search for similar items in EconPapers)
JEL-codes: C32 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-mac
Date: 2005-11
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Working Paper: The Balassa-Samuelsson effect and the wage, price and unemployment dynamics in Spain
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