Macroeconomic imbalances in Europe: How to overcome the fallacy of unit labour costs

Stefan Collignon and Piero Esposito

Journal of Policy Modeling, 2021, vol. 43, issue 3, 673-691

Abstract: Policy recommendations based on unit labour costs (ULC) indices can lead to undesirable and counterproductive policies, because they do not reveal possible distortions in the base year. In this paper, we discuss the problems with the ULC-current account relation and provide an alternative measure for relative wage costs called Wage Competitive index (WCI) based on the assumption of convergence of the returns on capital. We show how to calculate it and that it is more efficient than traditional ULC and REER indicators. The implication is that policymakers should not focus on nominal wage setting only, but also more broadly on all factors which affect the return on capital. This implies that the well-known Rehn–Meidner rule, which underlies the Macroeconomic Dialogue should be modified.

Keywords: Imbalances; Competitiveness; Unit labour costs; Return on capital; Europe; Panel data (search for similar items in EconPapers)
JEL-codes: C23 F15 F45 O52 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:43:y:2021:i:3:p:673-691

DOI: 10.1016/j.jpolmod.2020.04.004

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