IDEAS home Printed from https://ideas.repec.org/p/imk/fmmpap/23-2018.html
   My bibliography  Save this paper

Could a national wage rule stabilize the current account and functional income distribution in the Euro area?

Author

Listed:
  • Camille Logeay
  • Heike Joebges

Abstract

Since the introduction of the euro, divergent nominal wage developments in member countries contributed to economic imbalances, prominently visible in the current account. Wages are factor costs and as such key determinants of the price competitiveness of the tradable sector and the domestic price level of the whole economy in a monetary union. As income, they are an important determinant of domestic demand and imports. Building on the work of Horn/Logeay (2004), Herr/Horn (2012), and Onaran/Stockhammer (2016), this paper discusses how the adoption of a wage rule in member countries can help address the problem of economic imbalances. Yet, in contrast to the debate about wage?led vs. profit?led countries, and the overall growth effect of wage developments, we focus on the relationship between wages and the current account as well as the one between wages, prices, and functional income distribution. While we recommend the wage rule for all member countries, this article focuses on selected crisis countries. We first assess two conditions which are necessary in order for the wage rule to be valid: 1) demand aspects (the increase in domestic demand resulting from increased wages) outweigh cost aspects (the decrease in price competitiveness resulting from higher wages), 2) distributional effects do not prevent the transmission from wages to prices. We conclude that the implementation of the wage rule in member countries would have dampened economic divergences in the euro area, including current account imbalances. To promote the inclusion of the wage rule in all member countries, we recommend including the wage rule as a relevant indicator for the MIP?scoreboard of the European Commission, alongside support for labour market institutions. Furthermore, in order to stabilize the functional income distribution, profits (and taxes) would have to follow a similar rule.

Suggested Citation

  • Camille Logeay & Heike Joebges, 2018. "Could a national wage rule stabilize the current account and functional income distribution in the Euro area?," FMM Working Paper 23-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:fmmpap:23-2018
    as

    Download full text from publisher

    File URL: http://www.boeckler.de/pdf/p_fmm_imk_wp_23_2018.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hein, Eckhard, & Mundt, Matthias., 2012. "Financialisation and the requirements and potentials for wage-led recovery : a review focussing on the G20," ILO Working Papers 994709323402676, International Labour Organization.
    2. Gustav A. Horn & Fabian Lindner & Sabine Stephan, 2017. "Zur Rolle der Nominallöhne für die Handels- und Leistungsbilanzüberschüsse," IMK Report 125-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Ozlem Onaran & Thomas Obst, 2016. "Wage-led growth in the EU15 member-states: the effects of income distribution on growth, investment, trade balance and inflation," Cambridge Journal of Economics, Oxford University Press, vol. 40(6), pages 1517-1551.
    4. Konstantins Benkovskis & Julia Wörz, 2012. "Non-Price Competitiveness Gains of Central, Eastern and Southeastern European Countries in the EU Market," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 27-47.
    5. Tkačevs, Olegs & Christodoulopoulou, Styliani & Bobeica, Elena, 2016. "The role of price and cost competitiveness for intra- and extra-euro area trade of euro area countries," Working Paper Series 1941, European Central Bank.
    6. Gerlach, Stefan & Schnabel, Gert, 2000. "The Taylor rule and interest rates in the EMU area," Economics Letters, Elsevier, vol. 67(2), pages 165-171, May.
    7. Jesus Felipe & Utsav Kumar, 2014. "Unit labor costs in the eurozone: the competitiveness debate again," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(4), pages 490-507, October.
    8. Ullrich, Katrin, 2003. "A Comparison Between the Fed and the ECB: Taylor Rules," ZEW Discussion Papers 03-19, ZEW - Leibniz Centre for European Economic Research.
    9. Osbat, Chiara & Zollino, Francesco & Aiello, Giovanni & Bluhm, Benjamin & Buelens, Christian & Cavallini, Flavia & Joseph, Andreas & Leonte, Alexandru & Lommatzsch, Kirsten & Momchilov, Georgi & Giord, 2015. "Compendium on the diagnostic toolkit for competitiveness," Occasional Paper Series 163, European Central Bank.
    10. Gaulier, G. & Vicard, V., 2012. "Évolution des déséquilibres courants dans la zone euro : choc de compétitivité ou choc de demande ?," Bulletin de la Banque de France, Banque de France, issue 189, pages 47-64.
    11. Lommatzsch, Kirsten & Silgoner, Maria A. & Ramskogler, Paul, 2016. "Trade in value added: Do we need new measures of competitiveness?," Discussion Papers 52/2016, Deutsche Bundesbank.
    12. Horn, Gustav A. & Logeay, Camille, 2004. "Kritik am lohnpolitischen Konzept des Sachverständigenrats," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW - Leibniz Information Centre for Economics, vol. 84(4), pages 236-242.
    13. International Monetary Fund, 2013. "Euro Area Policies: 2013 Article IV Consultation," IMF Staff Country Reports 2013/231, International Monetary Fund.
    14. Gert Schnabel & Stefan Gerlach, 1999. "The Taylor rule and interest rates in the EMU area: a note," BIS Working Papers 73, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonio Forte, 2010. "The European Central Bank, the Federal Reserve and the Bank of England: Is the Taylor Rule a useful benchmark for the last decade?," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 53(2), pages 1-31.
    2. K. Benkovskis & B. Bluhm & E. Bobeica & C. Osbat & S. Zeugner, 2020. "What drives export market shares? It depends! An empirical analysis using Bayesian model averaging," Empirical Economics, Springer, vol. 59(2), pages 817-869, August.
    3. Fourcans, Andre & Vranceanu, Radu, 2004. "The ECB interest rate rule under the Duisenberg presidency," European Journal of Political Economy, Elsevier, vol. 20(3), pages 579-595, September.
    4. Villanueva, Paloma & Cárdenas, Luis & Uxó, Jorge & Álvarez, Ignacio, 2020. "The role of internal devaluation in correcting external deficits: The case of Spain," Structural Change and Economic Dynamics, Elsevier, vol. 54(C), pages 282-296.
    5. Gerdesmeier, Dieter & Roffia, Barbara, 2004. "Taylor rules for the euro area: the issue of real-time data," Discussion Paper Series 1: Economic Studies 2004,37, Deutsche Bundesbank.
    6. Gerdesmeier, Dieter & Roffia, Barbara, 2005. "The relevance of real-time data in estimating reaction functions for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 293-307, December.
    7. Eckhard Hein & Eckhard Achim Truger, 2017. "Opportunities and limits of rebalancing the Eurozone via wage policies," FMM Working Paper 06-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    8. Carlo Altavilla, 2003. "Assessing monetary rules performance across EMU countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(2), pages 131-151.
    9. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    10. Mr. Alvar Kangur, 2018. "Competitiveness and Wage Bargaining Reform in Italy," IMF Working Papers 2018/061, International Monetary Fund.
    11. Weinert, Gunter & Wohlers, Eckhardt & Bruck, Christiane & Feldkord, Eva-Ulrike & Hinze, Jorg & Kirchesch, Kai & Matthies, Klaus, 2005. "Konjunktur 2005: Weltwirtschaft bleibt auf Expansionskurs - Deutschland hinkt hinterher," Report Series 26115, Hamburg Institute of International Economics.
    12. Marc-Alexandre Sénégas, 2002. "La politique monétaire face à l'incertitude : un survol méthodologique des contributions relatives à la zone euro," Revue d'Économie Financière, Programme National Persée, vol. 65(1), pages 177-200.
    13. Karsten Ruth, 2007. "Interest rate reaction functions for the euro area," Empirical Economics, Springer, vol. 33(3), pages 541-569, November.
    14. Christos Pierros, 2021. "Assessing the internal devaluation policy implemented in Greece in an empirical stock‐flow consistent model," Metroeconomica, Wiley Blackwell, vol. 72(4), pages 905-943, November.
    15. Tobias Rühl, 2015. "Taylor rules revisited: ECB and Bundesbank in comparison," Empirical Economics, Springer, vol. 48(3), pages 951-967, May.
    16. Hein, Eckhard, 2020. "Financialisation and stagnation: A macroeconomic regime perspective," IPE Working Papers 149/2020, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    17. Clémentine Florens & Eric Jondeau & Hervé Le Bihan, 2001. "Assessing GMM Estimates of the Federal Reserve Reaction Function," Econometrics 0111003, University Library of Munich, Germany.
    18. Campana, Juan Manuel & Emboava Vaz, João & Hein, Eckhard & Jungmann, Benjamin, 2022. "Demand and growth regimes of the BRICs countries," IPE Working Papers 197/2022, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    19. Nora Albu & Heike Joebges & Rudolf Zwiener, 2018. "Increasing competitiveness at any price?," IMK Working Paper 192-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    20. Heather Anderson & Mardi Dungey & Denise Osborn & Farshid Vahid, 2007. "Constructing Historical Euro Area Data," Money Macro and Finance (MMF) Research Group Conference 2006 99, Money Macro and Finance Research Group.

    More about this item

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imk:fmmpap:23-2018. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sabine Nemitz (email available below). General contact details of provider: https://edirc.repec.org/data/fmbocde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.