Rethinking wage policy in the face of the Euro crisis: Implications of the wage-led demand regime

Ozlem Onaran and Engelbert Stockhammer

No 2011-2, Economics Discussion Papers from School of Economics, Kingston University London

Abstract: Ten years after its introduction, the Euro is in an existential crisis. The crisis is the outcome of economic policies that have aimed at labour market flexibility and financial integration. The paper argues, firstly, that the aggregate demand regime in the Euro area is wage led. While an increase in wages (other things equal) does have a negative effect on investment and on net exports, it does have a positive effect on consumption. As the Euro area is a relatively closed economy the consumption effect overpowers the investment effect and the export effect. Secondly, we argue that in the Euro area two growth models have emerged: a credit-led and an export-led model. These have given rise to the imbalances that are at the heart of the Euro crisis. Wage flexibility has proven insufficient to prevent these imbalances. Thirdly, we advocate a system of coordinated wage bargaining that aims at wages rising in line with productivity growth and a substantially upward-revised inflation target. If the project of European economic integration is to survive, it needs a drastic change in direction. An important building block of this redirection is a rethinking of the role of wage policy.

Keywords: Euro crisis; European integration; wage policy; Keynesian economics (search for similar items in EconPapers)
JEL-codes: E12 E20 E24 E42 E61 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Rethinking wage policy in the face of the Euro crisis. Implications of the wage-led demand regime (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:kngedp:2011_002

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