Unit labour costs and monetary policy decision-making in the context of EMU

Underpinning Economic and Monetary Union (EMU) are a series of institutional characteristics differentiating it from any previous monetary policy experience. Following the onset of Stage Three and the relinquishing of monetary sovereignty by the eleven member countries to the Eurosystem, the single monetary policy has been applied to eleven national economies. These retain, however, full autonomy for the formulation and implementation of other economic policies, although the latter are subject to various co-ordination procedures and there are common guidelines on the medium-term fiscal policy stance. In EMU, monetary policy decisions must be based on the analysis of economic and financial conditions for the euro zone as a whole and geared to sustaining area-wide price stability, without taking into account specific national particularities. Diagnosis of the economic and financial position of the area is a particularly arduous task. The presence of national economies with sovereignty over non-monetary spheres of economic policy means that this diagnosis must be made by appropriately integrating the behaviour of the various national economies. In recent years both the EMI, initially, and the ECB, subsequently, have worked towards constructing economic and financial indicators for the euro area that would provide a basis for this integrated analysis. Significant headway has been made, but further work is still required in many analytical areas. This is particularly the case for labour cost statistics, where problems of both a statistical and conceptual nature are apparent. The aim of this article is to outline the role that unit labour costs can play in euro-area economic analysis. In this connection, it is also intended to illustrate the need for good labour cost statistics both for the area and for the member countries. To this end, the first section discusses the problems associated with the construction of uniform unit labour cost series and presents the statistical information available for EMU. Next, the potential role of labour costs statistics in diagnosing the area’s inflationary situation is analysed, a key issue from the standpoint of the Eurosystem’s single monetary policy. Thereafter, there is a discussion of the use of such statistics in evaluating some of the problems that may arise in the new situation, as a result of the lack of synchrony among the area’s national economies. Lastly, reference is made to the importance of developing a sectoral analysis of labour costs so as to obtain knowledge of the price formation process and, therefore, of the source of the potential inflationary pressures that may build up in the euro area. Conclusions are drawn in the final section. It should be stressed that the article seeks to show the usefulness of specific analytical instruments in the context of EMU. That said, the data provided in the various sections to depict situations that should typically relate to the Monetary Union refer to the period prior to the start of EMU and are purely for illustrative purposes. These data have been constructed drawing on national series, prepared with different methodologies and aggregated using different criteria. They should be employed with caution, especially when conclusions are drawn for the EU-11.