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Wage Flexibility or Wage Coordination? Economic Policy Implications of the Wage-led Demand Regime in the Euro Area

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  • Engelbert Stockhammer

    (Vienna University of Economics and Business Administration)

Abstract

Wage shares have fallen substantially in Europe since the early 1980s. To some extent this is due to a macroeconomic policy package that encourages wage flexibility and wage competition. A system of wage coordination in the Euro area would facility a return to a productivity-oriented wage policy by reducing wage competition. In a recent study on the demand effects of changes in functional income distribution Stockhammer, Onaran und Ederer (2007) find that the Euro area is in a wage-led demand regime. According to their results a reduction of the wage share by 1%-point leads to a reduction of demand by around 0.2%-points of GDP. This finding has far reaching implications for economic policy. A stable wage share would help stabilize demand. The paper aims, first, at clarifying some conceptual issues in the design of a European system of productivity-oriented wage coordination and, second, it discusses the economic policy implications of wage coordination. The present policy package assigns wages the role of a shock absorber. However, as wage reductions do have negative demand effects in a wage-led demand regime, this policy has a deflationary bias. A system of wage coordination will thus have to be complemented by a more active nation fiscal policies and more fiscal redistribution within the EU. If so a regime of productivity oriented wage coordination will help to stabilize demand and it is consistent with price stability.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Engelbert Stockhammer, 2008. "Wage Flexibility or Wage Coordination? Economic Policy Implications of the Wage-led Demand Regime in the Euro Area," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 5(1), pages 54-62.
  • Handle: RePEc:elg:ejeepi:v:5:y:2008:i:1:p:54-62
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    Citations

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    Cited by:

    1. Peeters, Marga & Den Reijer, Ard, 2011. "On wage formation, wage flexibility and wage coordination : A focus on the wage impact of productivity in Germany, Greece, Ireland, Portugal, Spain and the United States," MPRA Paper 31102, University Library of Munich, Germany.
    2. Daniel Vaughan-Whitehead, 2010. "Fair Wages," Books, Edward Elgar Publishing, number 13968, May.
    3. Marga Peeters & Ard den Reijer, 2014. "Coordination versus flexibility in wage formation: a focus on the nominal wage impact of productivity in Germany, Greece, Ireland, Portugal, Spain and the United States," Applied Economics, Taylor & Francis Journals, vol. 46(7), pages 698-714, March.
    4. Giovanni Covi, 2020. "Euro area growth differentials: diverging and reinforcing factors in a Kaleckian SVAR approach," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 147-180, February.
    5. Giovanni Covi, 2021. "Trade imbalances within the Euro Area: two regions, two demand regimes," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(1), pages 181-221, February.
    6. Luděk Kouba & Michal Mádr & Danuše Nerudová & Petr Rozmahel, 2015. "Policy Autonomy, Coordination or Harmonisation in the Persistently Heterogeneous European Union? WWWforEurope Working Paper No. 95," WIFO Studies, WIFO, number 58136, December.

    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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