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Macroeconomic imbalances in Europe: How to overcome the fallacy of unit labour costs

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  • Collignon, Stefan
  • Esposito, Piero

Abstract

Policy recommendations based on unit labour costs (ULC) indices can lead to undesirable and counterproductive policies, because they do not reveal possible distortions in the base year. In this paper, we discuss the problems with the ULC-current account relation and provide an alternative measure for relative wage costs called Wage Competitive index (WCI) based on the assumption of convergence of the returns on capital. We show how to calculate it and that it is more efficient than traditional ULC and REER indicators. The implication is that policymakers should not focus on nominal wage setting only, but also more broadly on all factors which affect the return on capital. This implies that the well-known Rehn–Meidner rule, which underlies the Macroeconomic Dialogue should be modified.

Suggested Citation

  • Collignon, Stefan & Esposito, Piero, 2021. "Macroeconomic imbalances in Europe: How to overcome the fallacy of unit labour costs," Journal of Policy Modeling, Elsevier, vol. 43(3), pages 673-691.
    • Handle: RePEc:eee:jpolmo:v:43:y:2021:i:3:p:673-691
    DOI: 10.1016/j.jpolmod.2020.04.004
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    More about this item

    Keywords

    Imbalances; Competitiveness; Unit labour costs; Return on capital; Europe; Panel data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F15 - International Economics - - Trade - - - Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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