Reports
Calendar of Monetary and Economic Highlights
Economic Background
Balance of Payments in the First Quarter of 2002
Austria’s International Investment Position in 2001
Studies
“Wage Formation in the Euro Area”
EMU and European Wage Coordination
This paper focuses on the potential for a European dimension in wage negotiations. A number of ongoing changes contribute to facilitating the European coordination of wage bargaining. On the one hand, trade unions perceive an increased pressure to coordinate wage demands across countries in order to compensate for the loss of bargaining power caused by product market integration and EMU. On the other hand, obstacles to wage coordination are gradually declining. The preparations for the single European currency have not only brought about nominal, but also real convergence. At the same time, the focus of European policy makers is gradually shifting to the coordination of labor market policies and the integration of European labor markets. The Europeanization of wage bargaining is then evaluated in the light of two challenges to European labor markets: the need to reduce unemployment and the need for more wage flexibility to absorb asymmetric shocks as a substitute for monetary and fiscal policy. With respect to the first need, this analysis indicates that wage coordination may potentially lead to higher wage demands, which would not contribute to the desired unemployment reduction. With respect to the second need, it is found that wage coordination is not necessarily less flexible than wage competition, provided that trade unions do not unilaterally exploit problematic situations in other Member States.
Employment and Wage Adjustment in the Euro Area“s Labor Market − a Bird’s Eye View
The paper attempts to establish a few stylized facts about euro area’s labor market given the increasing importance of smoothly functioning markets in EMU. We assemble econometric evidence regarding labor demand behavior, the development of real wages and the cyclicality of unemployment in the euro area. The constant-output real wage elasticity of labor demand in the euro area is estimated between −0.5 and —0.6, and around 50% of adjustment toward the optimal employment level was achieved within one year. We find that the second half of the 1990s was characterized by a continued process of wage moderation. At present the real wage gap has approximately returned to its value thirty years ago. In the 1990s unemployment cyclicality was higher in the euro area than in the U.S.A., while the opposite had been true in the previous two decades. The main reason for this is that employment in the euro area today responds much more strongly to cyclical fluctuations in output than in the past, and even somewhat more strongly than in the U.S.A. After the cyclical trough in 1993 structural unemployment hovered at around 10.5%, before starting to decrease significantly from 1998 onwards.
Wage Setting and Strategic Interaction With and Without a Monetary Union
This study examines the impact the establishment of Economic and Monetary Union may have on European labor markets and the associated changes in the monetary, economic and institutional environment. In particular, it analyzes how the strategic interaction between central banks and labor unions could change and to what extent such effects depend on the foreign trade structure and monetary policy reaction functions. It is shown that, in contrast to the conventional argumentation, EMU membership may well reduce structural unemployment provided that central banks pursue not just a price stability target, but also a real target.
The Role of Wage Policies in a Monetary Union
The introduction of euro cash in the euro area countries marked the completion of the Third Stage of Economic and Monetary Union. This step also entailed sustained changes in the conditions under which economic policymakers act. Since the euro area countries gave up their sovereign monetary policies, sustained differences in inflation in tradable goods across the euro area are no longer feasible. For EMU to become a success as envisaged in the Maastricht Treaty, labor market flexibility in the participating countries will have to converge on productivity, prices and unemployment rates. If we use the developments up to monetary union as a yardstick, wage policies do not yet fulfill these requirements. Too little time has passed to give a final assessment of the process, but some empirical evidence suggests that differences continue to persist across the euro area countries. Furthermore, following the transfer of monetary responsibility it has become more difficult to coordinate monetary and wage policies.
Studies
Identification of Wage Rigidities in Microdata − a Critical Literature Review
Wage rigidity plays a key role in (neo-)Keynesian macroeconomic theory. According to a widely held view, nominal wage changes are downwardly limited. Amid low inflation rates, real wage cuts are thus hardly feasible, giving rise to unemployment. There is no shortage of approaches to explaining rigidity. In fact, the findings presented by economic psychologists, experimental economists as well as in company surveys corroborate the existence of rigidities. Attempts have been made for several years now to produce empirical proof of such rigidities by means of individual wage data. This literature review describes the analytical methods and summarizes the findings presented in the literature examined. For Anglo-American countries, most studies provide evidence of measurable wage stickiness. Proof of associated adverse macroeconomic implications is, however, missing. The first European papers identified somewhat stronger effects. Before we can draw conclusions about (Europe’s) economic policy from such findings, research will, it seems, have to cover more countries, use more reliable data and employ a wider focus.