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Has EMU Had Any Impact on the Degree of Wage Restraint?

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  • Adam S. Posen

    ()
    (Institute for International Economics)

  • Daniel Popov Gould

    (Institute for International Economics)

Abstract

This working paper investigates the European Monetary Unification’s (EMU) effect on wage restraint—the degree to which wage increases do or do not exceed productivity growth. We find in cross-sectional investigations that wage restraint either is unchanged or has increased following EMU in the vast majority of countries. This finding contradicts the predictions of a widely cited family of models of coordination of labor market bargaining. In particular, one would have expected Germany to display the greatest decline in wage restraint post-EMU under these models, but in our time-series analysis we find no indication of such a decline. The overall shift toward greater wage restraint is consistent with the models that emphasize the gains from monetary credibility. The time-series evidence on Italy, which shows a significant increase in wage restraint after eurozone entry, also supports this view. That said, the increase in wage restraint in the eurozone is matched by that associated with the increase in credibility seen in the United Kingdom and Sweden after their adoption of inflation targeting post-1992.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP06-6.

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Date of creation: Aug 2006
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Handle: RePEc:iie:wpaper:wp06-6

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Keywords: EMU; wage bargaining; monetary credibility; productivity;

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References

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  1. Soskice, David & Iversen, Torben, 1998. "Multiple Wage-Bargaining Systems in the Single European Currency Area," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 110-24, Autumn.
  2. Cukierman, A. & Lippi, F., 2000. "Labor Markets and Monetary Union: a Strategic Analysis," Papers 365, Banca Italia - Servizio di Studi.
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  4. Posen, Adam S, 1998. "Do Better Institutions Make Better Policy? Review," International Finance, Wiley Blackwell, vol. 1(1), pages 173-205, October.
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  15. Bernd Hayo, 2006. "Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis," Marburg Working Papers on Economics 200610, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
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  18. Cukierman, A. & Lippi, F., 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence," Discussion Paper 1998-116, Tilburg University, Center for Economic Research.
  19. Posen, Adam, 1998. "Why EMU is irrelevant for the German economy," CFS Working Paper Series 1998/11, Center for Financial Studies (CFS).
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  21. Olivier Jean Blanchard, 1991. "Wage Bargaining and Unemployment Persistence," NBER Working Papers 3664, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Sánchez, Marcelo, 2009. "National prices and wage setting in a currency union," Working Paper Series 1058, European Central Bank.
  2. Söderström, Ulf, 2008. "Re-Evaluating Swedish Membership in EMU: Evidence from an Estimated Model," Working Paper Series 227, Sveriges Riksbank (Central Bank of Sweden).
  3. repec:hal:cesptp:halshs-00140529 is not listed on IDEAS
  4. Sánchez, Marcelo, 2010. "Wage restraint and monetary union," Economic Modelling, Elsevier, vol. 27(1), pages 134-142, January.
  5. Sánchez, Marcelo, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 0927, European Central Bank.
  6. Carsten Hefeker, 2006. "The monetary policy consequences of enlargement," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 7(4), pages 29-34, December.
  7. Ulf Söderström, 2010. "Reevaluating Swedish Membership in the European Monetary Union: Evidence from an Estimated Model," NBER Chapters, in: Europe and the Euro, pages 379-414 National Bureau of Economic Research, Inc.

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