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Economic integration and unit labour costs

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  • Piton, Sophie

Abstract

Unit Labour Costs (ULC) have increased much faster in the periphery than in core Eurozone countries since 1995. This divergence was pointed as a key amplifying factor in the Euro’s 2010 crisis; but there is no consensus to date on its cause. This paper investigates the drivers of ULC divergence. It shows that faster tradable productivity growth in the periphery –i.e. real convergence– contributed to rising real exchange rates and a sectoral shift towards non-tradable sectors, resulting in increasing ULC. This productivity effect explains one-third of the rise in ULC dispersion between 1995 and 2015. This fact bears important implications: it suggests that any effort towards further real convergence in Europe could be associated with a resurgence of ULC divergence, and it questions the use of rising ULC dispersion as an indicator of rising macroeconomic imbalances. (JEL: E65, F41, F45, O33, O41, O47, O52.)

Suggested Citation

  • Piton, Sophie, 2021. "Economic integration and unit labour costs," European Economic Review, Elsevier, vol. 136(C).
  • Handle: RePEc:eee:eecrev:v:136:y:2021:i:c:s0014292121000994
    DOI: 10.1016/j.euroecorev.2021.103746
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    More about this item

    Keywords

    Economic integration; Productivity; Structural change; Non-tradable sector; Growth accounting;
    All these keywords.

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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