Tuesday, January 3, 2012
Apart from the fiscal compact – on competitiveness, nominal wages and labour productivity
January 3, 2012
While EU leaders are drafting a fiscal compact, the problem of intra-European real exchange-rate misalignments remains. This column argues that reducing imbalances implies a focus on competitiveness, and hence on the alignment of nominal-wage growth with labour-productivity growth.
Eurozone members that face the consequences of severe asymmetric shocks can, in the absence of labour mobility, accommodate by means of fiscal transfers. In order to avoid becoming a one-way transfer union from the core to the periphery, the EU needs to address structural imbalances and persistent current-account deficits and surpluses that are due to real exchange-rate misalignment. For this reason, EU leaders started pushing for stronger economic policy integration focused on competitiveness and convergence of the Eurozone countries, and agreed earlier this year on a “competitiveness” pact (Euro-Plus Pact). As nominal exchange rates in a currency union are fixed, the price level is the only instrument for member states to correct real exchange-rate misalignment. Apart from the fiscal aspects that will be part of the fiscal compact to be enshrined in national law early next year, elements of the Euro-Plus Pact will also have to be part of it.
In order to increase product-price competitiveness in world markets, the growth in unit labour costs at national levels should be moderate. This implies that member states should align nominal-wage growth with labour-productivity growth, as the competitiveness pact prescribes. We explain what this means for the indebted periphery countries in comparison with Germany – a country that contained wages in recent years – by comparing recent developments and estimating wage elasticities across these countries at the macro level.
We share the view that aligning nominal-wage growth and productivity growth is a must for Eurozone member states in the absence of a fiscal union (see also Vanthoor 1996). We reason that the focus in the wage formation process should be on labour productivity and that there is no room for automatic indexation to prices. To steer the wage negotiation between employers and employees who are essentially private actors, we see the replacement rate as a policy instrument in the hands of the national governments.