IDEAS home Printed from https://ideas.repec.org/a/eee/jpolmo/v40y2018i2p284-304.html
   My bibliography  Save this article

The trinity of wage setting in EMU: A policy proposal

Author

Listed:
  • Gächter, Martin
  • Ramskogler, Paul
  • Riedl, Aleksandra

Abstract

Diverging labor cost developments are often considered to be one of the most important factors that led to large current account imbalances in the euro area (EA) in the run-up to the global financial crisis. It has also been shown that wage growth differentials have significantly lowered the co-movement of EA countries’ business cycles – the most widely used meta-criterion for optimum currency areas. Against this background, this paper develops a wage-setting benchmark that aims to keep the economy in internal equilibrium and to maintain price stability, while it also exhibits the capacity to correct for external imbalances. The proposed wage benchmark is very simple and may serve as an anchor for the macroeconomic dialogue in Economic and Monetary Union. In order to demonstrate the potentially beneficial effects of such a wage benchmark we present some simulations showing how current account balances and labor costs would have developed across EA countries if the rule had served as a benchmark already in the run up to the crisis.

Suggested Citation

  • Gächter, Martin & Ramskogler, Paul & Riedl, Aleksandra, 2018. "The trinity of wage setting in EMU: A policy proposal," Journal of Policy Modeling, Elsevier, vol. 40(2), pages 284-304.
    • Handle: RePEc:eee:jpolmo:v:40:y:2018:i:2:p:284-304
    DOI: 10.1016/j.jpolmod.2018.01.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0161893818300048
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpolmod.2018.01.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-1025, July.
    2. Martin Gächter & Alexander Gruber & Aleksandra Riedl, 2017. "Wage Divergence, Business Cycle Co-Movement and the Currency Union Effect," Journal of Common Market Studies, Wiley Blackwell, vol. 55(6), pages 1322-1342, November.
    3. Mr. Stephen Tokarick, 2010. "A Method for Calculating Export Supply and Import Demand Elasticities," IMF Working Papers 2010/180, International Monetary Fund.
    4. Gourinchas, Pierre-Olivier & Rey, Hélène & Truempler, Kai, 2012. "The financial crisis and the geography of wealth transfers," Journal of International Economics, Elsevier, vol. 88(2), pages 266-283.
    5. Alison Johnston & Aidan Regan, 2016. "European Monetary Integration and the Incompatibility of National Varieties of Capitalism," Journal of Common Market Studies, Wiley Blackwell, vol. 54(2), pages 318-336, March.
    6. Willi Koll, 2013. "The new economic governance arrangements and autonomous collective bargaining in the European Union," IMK Studies 30e-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    7. Inklaar, Robert & Jong-A-Pin, Richard & de Haan, Jakob, 2008. "Trade and business cycle synchronization in OECD countries--A re-examination," European Economic Review, Elsevier, vol. 52(4), pages 646-666, May.
    8. Baxter, Marianne & Kouparitsas, Michael A., 2005. "Determinants of business cycle comovement: a robust analysis," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 113-157, January.
    9. Engelbert Stockhammer & Özlem Onaran, 2012. "Rethinking wage policy in the face of the Euro crisis. Implications of the wage-led demand regime," International Review of Applied Economics, Taylor & Francis Journals, vol. 26(2), pages 191-203, September.
    10. Gächter, Martin & Riedl, Aleksandra, 2014. "One money, one cycle? The EMU experience," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 141-155.
    11. Paul Ramskogler, 2013. "The National–Transnational Wage-Setting Nexus in Europe: What have We Learned from the Early Years of Monetary Integration?," Journal of Common Market Studies, Wiley Blackwell, vol. 51(5), pages 916-930, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christian Beer & Christian Alexander Belabed & Andreas Breitenfellner & Christian Ragacs & Beat Weber, 2017. "EU integration and its impact on Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1/2017, pages 1-38.
    2. Martin Gächter & Alexander Gruber & Aleksandra Riedl, 2017. "Wage Divergence, Business Cycle Co-Movement and the Currency Union Effect," Journal of Common Market Studies, Wiley Blackwell, vol. 55(6), pages 1322-1342, November.
    3. Lehner, Lukas & Ramskogler, Paul & Riedl, Aleksandra, 2022. "Begging thy coworker – Labor market dualization and the slow-down of wage growth in Europe," INET Oxford Working Papers 2022-04, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    4. Doménech, Rafael & García, Juan Ramón & Ulloa, Camilo, 2018. "The effects of wage flexibility on activity and employment in Spain," Journal of Policy Modeling, Elsevier, vol. 40(6), pages 1200-1220.
    5. Konopczak, Karolina, 2019. "Modelling labour adjustments over the business cycle: evidence from non-linear ARDL model," MF Working Papers 35, Ministry of Finance in Poland.
    6. Christian Beer & Christian Alexander Belabed & Andreas Breitenfellner & Christian Ragacs & Beat Weber, 2017. "Österreich und die europäische Integration," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 86-126.
    7. Konopczak, Karolina, 2021. "Modelling labour adjustments over the business cycle using asymmetric cointegration," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).
    8. Camarero, Mariam & D’Adamo, Gaetano & Tamarit, Cecilio, 2021. "Differences in wage determination in the Eurozone: A challenge to the resilience of the common currency," Journal of Policy Modeling, Elsevier, vol. 43(1), pages 183-199.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Gächter & Alexander Gruber & Aleksandra Riedl, 2017. "Wage Divergence, Business Cycle Co-Movement and the Currency Union Effect," Journal of Common Market Studies, Wiley Blackwell, vol. 55(6), pages 1322-1342, November.
    2. Sabrina Bunyan & David Duffy & George Filis & Ishmael Tingbani, 2020. "Fiscal policy, government size and EMU business cycle synchronization," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(2), pages 201-222, May.
    3. Sabrina Bunyan & David Duffy & George Filis & Ishmael Tingbani, 2018. "Bilateral business cycle synchronisation in the EMU: What is the role of fiscal policy and government size?," Working Papers 2018.02, International Network for Economic Research - INFER.
    4. Ansgar Belke & Clemens Domnick & Daniel Gros, 2017. "Business Cycle Synchronization in the EMU: Core vs. Periphery," Open Economies Review, Springer, vol. 28(5), pages 863-892, November.
    5. Rémi Odry & Roman Mestre, 2021. "Monetary Policy and Business Cycle Synchronization in Europe," Working Papers hal-04159759, HAL.
    6. Mohd Hussain Kunroo, 2019. "Trade, Industrial Dissimilarity, FDI and Business Cycle Co-movements: EC3SLS Evidence from Eurozone Economies," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 13(3), pages 327-359, August.
    7. Ageliki Anagnostou & Ioannis Panteladis & Maria Tsiapa, 2015. "Disentangling different patterns of business cycle synchronicity in the EU regions," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(3), pages 615-641, August.
    8. Stefano Schiavo, 2008. "Financial Integration, GDP Correlation and the Endogeneity of Optimum Currency Areas," Economica, London School of Economics and Political Science, vol. 75(297), pages 168-189, February.
    9. Herrmann-Pillath, Carsten & Libman, Alexander & Yu, Xiaofan, 2014. "Economic integration in China: Politics and culture," Journal of Comparative Economics, Elsevier, vol. 42(2), pages 470-492.
    10. Lee, Hyun-Hoon & Park, Cyn-Young & Pyun, Ju Hyun, 2024. "International business cycle synchronization: A synthetic assessment," Japan and the World Economy, Elsevier, vol. 69(C).
    11. J.-S. Pentecôte & J.-C. Poutineau & F. Rondeau, 2015. "Trade Integration and Business Cycle Synchronization in the EMU: The Negative Effect of New Trade Flows," Open Economies Review, Springer, vol. 26(1), pages 61-79, February.
    12. Yifan Shen & Tilak Abeysinghe, 2021. "International Transmission Mechanism And World Business Cycle," Economic Inquiry, Western Economic Association International, vol. 59(1), pages 510-531, January.
    13. Michaelides, Panayotis G. & Papageorgiou, Theofanis, 2012. "On the transmission of economic fluctuations from the USA to EU-15 (1960–2011)," Journal of Economics and Business, Elsevier, vol. 64(6), pages 427-438.
    14. Luís Aguiar-Conraria & Teresa Maria Rodrigues & Maria Joana Soares, 2014. "Oil Shocks and the Euro as an Optimum Currency Area," Dynamic Modeling and Econometrics in Economics and Finance, in: Marco Gallegati & Willi Semmler (ed.), Wavelet Applications in Economics and Finance, edition 127, pages 143-156, Springer.
    15. Pundit,Madhavi, 2013. "Comovement in business cycles and trade in intermediate goods," Working Papers 13/116, National Institute of Public Finance and Policy.
    16. Ahlborn, Markus & Wortmann, Marcus, 2018. "The core‒periphery pattern of European business cycles: A fuzzy clustering approach," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 12-27.
    17. António Afonso & Davide Furceri, 2009. "Sectoral Business Cycle Synchronization in the European Union," Economics Bulletin, AccessEcon, vol. 29(4), pages 2996-3014.
    18. de Soyres, François & Gaillard, Alexandre, 2022. "Global trade and GDP comovement," Journal of Economic Dynamics and Control, Elsevier, vol. 138(C).
    19. Miankhel, Adil Khan & Kalirajan, Kaliappa & Thangavelu, Shandre, 2010. "Integration, decoupling and the global financial crisis: A global perspective," MPRA Paper 22837, University Library of Munich, Germany.
    20. Crespo-Cuaresma, Jesús & Fernández-Amador, Octavio, 2013. "Business cycle convergence in EMU: A first look at the second moment," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 265-284.

    More about this item

    Keywords

    Wage bargaining; Currency union; Golden Rule; Productivity; Nominal unit labor costs;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:40:y:2018:i:2:p:284-304. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505735 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.