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Economic integration and unit labour costs

Sophie Piton

European Economic Review, 2021, vol. 136, issue C

Abstract: Unit Labour Costs (ULC) have increased much faster in the periphery than in core Eurozone countries since 1995. This divergence was pointed as a key amplifying factor in the Euro’s 2010 crisis; but there is no consensus to date on its cause. This paper investigates the drivers of ULC divergence. It shows that faster tradable productivity growth in the periphery –i.e. real convergence– contributed to rising real exchange rates and a sectoral shift towards non-tradable sectors, resulting in increasing ULC. This productivity effect explains one-third of the rise in ULC dispersion between 1995 and 2015. This fact bears important implications: it suggests that any effort towards further real convergence in Europe could be associated with a resurgence of ULC divergence, and it questions the use of rising ULC dispersion as an indicator of rising macroeconomic imbalances. (JEL: E65, F41, F45, O33, O41, O47, O52.)

Keywords: Economic integration; Productivity; Structural change; Non-tradable sector; Growth accounting (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.euroecorev.2021.103746

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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