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.
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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number
wp160.
Find related papers by JEL classification: E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data) E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution 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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