Wage dynamics in the EMU

Anneleen Vandeplas, Alfonso Arpaia (), Eric Ruscher, Alessandro Turrini and Werner Roger

Quarterly Report on the Euro Area (QREA), 2018, vol. 17, issue 3, 9-26

Abstract: This section takes stock of recent wage developments in the euro area given their importance for the well-functioning of the EMU. In the euro area, wage developments not only affect the allocation of resources and social cohesion, but also macro-economic adjustment. The latter is especially important in view of the remaining rebalancing challenges in the euro area. The section identifies several factors that may have caused sluggish wage growth in the euro area until recently, in spite of robust economic growth. It shows that remaining slack and low productivity growth can account for some of this slowdown in wage growth, but leave a significant amount unexplained. Adding backward- and forwardlooking inflation measures improves the fit of the predicted values considerably. Other potential contributing factors to the observed wage dynamics are reviewed as well: broader measures of labour market slack, ongoing structural labour market changes, the downward trend in hours worked per employee, and the after-effects of downward nominal wage rigidities. The section shows that while wage developments mainly result from the interaction between market forces, policymakers have a number of instruments at hand to influence wage developments. These include public and minimum wages, the tax and benefit system, and the steering of collective bargaining in the private sector via tripartite agreements or by reviewing legal frameworks for negotiation in consultation with social partners. Structural reforms can also influence wage and labour cost developments, albeit in a more indirect way. Of particular importance are reforms that support productivity growth, e.g. by making labour markets more adaptable and improving allocative efficiency, and by investment in human capital and innovation.

Keywords: sluggish wage growth; euro area; labour cost; unit labour cost; Phillis curve; allocative efficiency; human capital; labour market slack (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0173-01

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