Arpaia, Alfonso and Pichelmann, Karl (2007): Nominal and real wage flexibility in EMU.
Download (676kB) | Preview
Both common macroeconomic shocks and country-specific developments have subjected the flexibility of wage setting mechanisms in the euro area to a stress test in recent years. Against this background, this paper takes a fresh look at wage flexibility in EMU and attempts to draw a few lessons from the experience of the early years. First, we set the stage for the analysis by providing a brief description of the stylised facts regarding nominal and real wage and unit labour cost developments in the euro area over the recent business cycle. Then, the paper presents an empirical assessment of wage inertia based on new econometric estimates of a Phillips-curve type wage equation across euro area countries and offers an interpretation of the main findings with respect to nominal and real wage flexibility. Finally, we investigate the cyclical responsiveness of relative competitive positions among euro area countries. We conclude that from a bird's eye perspective euro area wage and labour cost dynamics have been quite benign in the past couple of years. However, our estimates suggest that persistent cross-country differences in wage and labour cost developments have not always reflected warranted adjustment needs; they are rather indicative of an eventually insufficient degree of nominal and real wage flexibility in the euro area.
|Item Type:||MPRA Paper|
|Institution:||Directorate General for Economic and Financial Affairs - European Commission|
|Original Title:||Nominal and real wage flexibility in EMU|
|Keywords:||Phillips curve; nominal and real rigidities; unit labour costs; EMU|
|Subjects:||J - Labor and Demographic Economics > J0 - General
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
|Depositing User:||Alfonso Arpaia|
|Date Deposited:||07. Aug 2007|
|Last Modified:||12. Feb 2013 03:31|
AIZEMAN, J. and J. FRENKEL (1986), "Sectoral wages and the real exchange rate", NBER Working Paper No 1801. ALLSOPP, C. and D. VINES (1998), "The assessment: Macroeconomic policy after EMU", Oxford Review of Economic Policy, 14, No. 3, 1-23. ALTISSIMO, F., P. BENIGNO and D. RODRIGUEZ-PALENZUELA (2004), "Inflation Differentials in a Currency Area: Facts explanations and policy", Mimeo. ANDERSEN, T.M. (2003), "Wage formation and European integration", mimeo, European Commission DG ECFIN. ANDERSEN, T.M. (2004), "Heterogeneous wage formation under common monetary policy", CEPR, Discussion Paper No 4430. Ball, L. and Mankiw, G. "Asymmetric Price Adjustment and Economic Fluctuations", Economic Journal, 104, Mar. 1994, 247-261. BALTAGI, B.H. (2002), "Econometric Analysis of Panel Data" , John Wiley and Sons. BALTAGI, B.H. and Li, Qi (1995), "Testing AR(1) against MA(1) disturbances in an error component model", Journal of Econometrics, 68, 133-51. BATINI, N., B. JACKSON, and S. NICKELL (2002), "Inflation Dynamics and the labour Share in the U.K", External MPC Unit Discussion Paper No. 2, Bank of England. BECK,N. and J. KATZ, "What to Do ( and Not to Do) with Time-Series-Cross-Section Data in Comparative Politics", American Political Science Review, 89, 1995, 634-647. BEISSINGER, T. and C. KNOPPIK (2003), "Sind Nominallöhne starr? Neuere Evidenz und wirtschaftspolitische Implikationen", IZA Discussion Paper No. 800, June 2003. BLANCHARD, O (1997), "The Medium run", Brookings Papers on Economic Activity, 2, 89-158. BLANCHARD, O (1998), " Revisiting European unemployment: Unemployment, capital accumulation, and factor prices" Geary Lecture, ESRI June 1998. BLANCHARD, O (2006), "European unemployment the evolution of facts and ideas", Economic Policy,21 No. 45. BLANCHARD, O. and L. F. KATZ (1999), “Wage Dynamics : Reconciling Theory and Evidence”, American Economic Review,89, 69-74. CAHUC, P. and A. ZYLBERBERG (2004), "Labor Economics", MIT Press. BOOTH , A. (1995), "The economics of the Trade Union", Cambridge University Press. COENEN, G. (2003), "Downward nominal wage rigidity and the long-run Phillips curve: Simulation-based evidence for the euro area", Background study related to the ECB's definition of price stability, ECB, http://www.ecb.int/pub strategy/CoenenWageRigidity.pdf; DECRESSIN, A. and J. DECRESSIN (2002), "On sand and the role of grease in labor markets: How does Germany compare?" IMF Working Paper NO 02/164. DESSY, O. (2002), "Nominal wage rigidity in the European countries: Evidence from the Europanel", CREST-INSEE,http://www.diw.de/deutsch/abteilungen/ldm/archiv/ ar2002/panel2002/session_d2/111_dessy.pdf. DORNBUSCH, R (1974), "Tariffs and non-traded goods", Journal of International Economics, 4, 177-196. DUFRESNE, A. and E. MERMET (2002), "Trends in the coordination of collective bargaining in Europe", http://www.etuc.org/ETUI/Publications/DWP/ 02mermet.pdf. EUROPEAN COMISSION (1997), "Economic Policy in EMU, Part B: Specific topics", DG ECFIN Economic papers No. 125. EUROPEAN COMISSION (2001), "The EU economy: 2001 review", European Economy No. 73. EUROPEAN COMISSION (2002), "The EU economy: 2002 review", European Economy No. 6/2002. GALI, J. and M. GERTLER (1999), "Inflation Dynamics: A Structural Econometrics Analysis," Journal of Monetary Economics,44, 195-222. GALI, J., M. GERTLER, and D. LÓPEZ-SALIDO (2001) "European inflation dynamics", European Economic Review, 45, 1237-70. GALI, J., M. GERTLER, and D. LÓPEZ-SALIDO (2002), "Mark-ups, gaps and the welfare costs of business fluctuations", mimeo, Universita Pompeu Fabra http://www.econ.upf.es/ ~gali/pdf_files/gglgap.pdf . GORDON, R. J. (1990), “US Inflation, Labor’s Share and the Natural Rate of Unemployment”, In: Economics of Wage Determination, edited by H. Koenig. Berlin and New York: Springer Verlag, 1-34. GROTH C. and A. JOHANSSON (2002) "Bargaining structure and nominal wage flexibility", Stockholm University, Institute for Economic Studies Seminar Paper No. 709. HANCKÉ, B. and D. SOSKICE (2003), "Wage-setting and inflation targets in EMU", Oxford Review of Economic Policy, 19, No. 1, 149-160. HOLDEN, S. (2002), "The costs of price stability – downward nominal wage rigidity in Europe", mimeo, University of Oslo. IMF (2003), "Euro area Policies: selected issues", IMF Country Report No. 3/298, Washington D.C. KIELER, M. (2003), “The ECB’s inflation objective” IMF Working Paper 03/91. KNOPPIK, C. and T. BEISSINGER (2001), "How rigid are nominal wages? Evidence and implications for Germany", IZA Discussion Paper No. 357. LILIEN, D.M. (1982), "Sectoral Shifts and Cyclical Unemployments", Journal of Political Economy, 90(4), 777-93. MANZINI P. and D. SNOWER (2002), "Wage determination and the sources of bargaining power", IZA Discussion Paper No. 535, July. MARSHALL, R.C. and A. MERLO (1999): Pattern Bargaining”, Penn Institute for Economic Research, PIER Working paper 01-032. MURPHY, K.J. (2000), “What effect does uncertainty have on the length of labour contracts?”, Labour Econmics, Vol. 7,181-200. PESARAN, M. H. and SMITH, R. (1995), “Estimating long-run relationship from dynamic heterogeneous panel”, Journal of Econometrics, 68, 79-113. PISSARIDES, C.A. (1997), "The need for labor-market flexibility in a European economic and monetary union", Swedish Economic Policy Review, Vol. 4 (2), 513-546. 33 PISSARIDES, C.A. (1998), “The Impact of Unemployment Cuts on Employment and Wages: The Role of Unemployment Benefits and Tax Structure”, European Economic Review, 42, 155-84. CHEN, P. CHIARELLA, C. and SEMMLER, W. "Keynesian Dynamics and the Wage- Price Spiral. Analyzing and Estimating a Baseline Disequilibrium Model" forthcoming Journal of Monetary Economics. GREENE, W (2003), "Econometric Analysis" fifth edition Prentice Hall. SHAFIR, E.P., Diamond, P. and A. Tversky (1997), "Money illusion", Quarterly Journal of Economics, Vol. 112, pp. 341-374. UK HM Treasury (2003): "EMU and labour market flexibility", EMU study. TAYLOR, J. (1980), "Aggregate Dynamics and Staggered Contracts", Journal of Political Economy, 88, 1-24. Turner, D. and E. SEGHEZZA (1999), “Testing for a common OECD Phillips curve”, OECD Economics Department Working Paper No 219. WHELAN, K (2002), "Real wage dynamics and the Phillips curve", Finance and Economic Discussion Series No 2, Federal Reserve Board. VAN HET KAAR, R. and M. GRÜNELL (2001), "Variable pay in Europe" EIROnline, April 2001, http://www.eiro.eurofound.ie/2001/04/study/TN0104201S.html.