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Wage, Price and Unemployment Dynamics in the Spanish Transition to EMU Membership

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  • Jusélius, Katarina
  • Ordóñez, Javier

Abstract

This paper provides an empirical investigation of the wage, price and unemployment dynamics that have taken place in Spain during the last two decades. The aim of this paper is to shed light on the impact of the European economic integration process on Spanish labour market and the convergence to a European level of prosperity. We find some important lessons to be learnt from the Spanish experience that should be relevant for the new member states. Second, before fixing the real exchange rate it seems crucial that it is on its sustainable (competitive) purchasing power parity level. First, high competitiveness in the tradable sector seems crucial for the real and nominal convergence to be successful. The increase in consumption wages and consumer prices as a result of the Balassa-Samuelson effect should not be allowed to exceed the improvement in productivity. Second, before fixing the real exchange rate it seems crucial that it is on its sustainable (competitive) purchasing power parity level. Third, there does not seem to be a short-cut to a European level of standard of living: the path to sustainable prosperity seems to follow the path of productivity improvement. Forth, excessive real wage increases seem to lead to increasing unemployment, slowdown in productivity growth, higher interest rates, and loss of competitiveness. On the other hand, the access to the European market and the possibility of increased export demand is likely to speed up the convergence process as long as competitiveness is not eroded by excess wage increases. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2008-20.

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Date of creation: 2008
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Handle: RePEc:zbw:ifwedp:7265

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Keywords: Balassa-Samuelson effect; nominal and real convergence; unemployment dynamics; purchasing power parity; cointegrated VAR;

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  1. Søren Johansen & Katarina Juselius & Roman Frydberg & Michael Goldberg, 2008. "Testing hypotheses in an I(2) model with applications to the persistent long swings in the Dmk/$ rate," CREATES Research Papers 2008-03, School of Economics and Management, University of Aarhus.
  2. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
  3. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  4. Banerjee, Anindya & Russell, Bill, 2005. "Inflation and measures of the markup," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 289-306, June.
  5. Juselius, Katarina & MacDonald, Ronald, 2004. "International parity relationships between the USA and Japan," Japan and the World Economy, Elsevier, vol. 16(1), pages 17-34, January.
  6. Moene, K.O. & Wallerstein, M. & Hoel, M., 1992. "Bargaining Structure and Economic Performance," Memorandum 10/1992, Oslo University, Department of Economics.
  7. David Colander, 2008. "The Economy as an Evolving Complex System III: Current Perspectives and Future Directions. Edited by LAWRENCE E. BLUME and STEVEN N. DURLAUF," Economica, London School of Economics and Political Science, vol. 75(297), pages 191-192, 02.
  8. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
  9. Juselius, Katarina & Toro, Juan, 2005. "Monetary transmission mechanisms in Spain: The effect of monetization, financial deregulation, and the EMS," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 509-531, April.
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