Labor cost, competitiveness, and imbalances within the eurozone

Loïck Tange

Journal of Post Keynesian Economics, 2024, vol. 47, issue 2, 282-345

Abstract: This paper examines the impact of the cost of labor on macroeconomic imbalances within the eurozone. For this purpose, we construct a three-country Stock-Flow Consistent (SFC) macroeconomic model in an open economy including the eurozone and the rest of the world. We show that internal devaluation is not effective as an economic policy for getting the eurozone economies to converge. Cutting labor costs cannot kick-start economic activity through a rebound in exports of those countries that do so. Instead, it involves the risk of locking their economies concerned into low-wage production activities. The fall in unemployment it entails is the consequence, then, of a downturn in labor productivity. In contradistinction, we defend the idea that the introduction of a new wage rule making monetary wages dependent on productivity gains and on the target for inflation set by the European Central Bank, together with a budgetary stimulation policy, would be conducive to initiating convergence among European economies. In particular, it would produce a convergence in living conditions by improving labor productivity but it would also bring production structures closer together.

Date: 2024
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DOI: 10.1080/01603477.2023.2286485

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