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Rethinking wage policy in the face of the Euro crisis. Implications of the wage-led demand regime

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  • Engelbert Stockhammer
  • Özlem Onaran

Abstract

Ten years after its introduction, the Euro is in an existential crisis. The crisis is the outcome of economic policies that have aimed at labour market flexibility and financial integration. This paper argues, firstly, that the aggregate demand regime in the Euro area is wage led. While an increase in wages (other things equal) does have a negative effect on investment and on net exports, it does have a positive effect on consumption. As the Euro area is a relatively closed economy, the consumption effect overpowers the investment effect and the export effect. Secondly, we argue that in the Euro area two growth models have emerged: a credit-led and an export-led model. These have given rise to the imbalances that are at the heart of the Euro crisis. Wage flexibility has proven insufficient to prevent these imbalances. Thirdly, we advocate a system of coordinated wage bargaining that aims at wages rising in line with productivity growth and a substantially upward-revised inflation target. If the project of European economic integration is to survive, it needs a drastic change in direction. An important building block of this redirection is a rethinking of the role of wage policy.

Suggested Citation

  • Engelbert Stockhammer & Özlem Onaran, 2012. "Rethinking wage policy in the face of the Euro crisis. Implications of the wage-led demand regime," International Review of Applied Economics, Taylor & Francis Journals, vol. 26(2), pages 191-203, September.
    • Handle: RePEc:taf:irapec:v:26:y:2012:i:2:p:191-203
    DOI: 10.1080/02692171.2011.631903
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    References listed on IDEAS

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    1. Engelbert Stockhammer & Stefan Ederer, 2008. "Demand effects of the falling wage share in Austria," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 35(5), pages 481-502, December.
    2. Larch, Martin & Van den Noord, Paul & Jonung, Lars, 2010. "The stability and growth pact: lessons from the great recession," MPRA Paper 27900, University Library of Munich, Germany.
    3. Engelbert Stockhammer & Eckhard Hein & Lucas Grafl, 2011. "Globalization and the effects of changes in functional income distribution on aggregate demand in Germany," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(1), pages 1-23.
    4. Taylor, Lance, 1985. "A Stagnationist Model of Economic Growth," Cambridge Journal of Economics, Oxford University Press, vol. 9(4), pages 383-403, December.
    5. Arestis, Philip & McCauley, Kevin & Sawyer, Malcolm, 2001. "An Alternative Stability Pact for the European Union," Cambridge Journal of Economics, Oxford University Press, vol. 25(1), pages 113-130, January.
    6. Engelbert Stockhammer & Özlem Onaran & Stefan Ederer, 2009. "Functional income distribution and aggregate demand in the Euro area," Cambridge Journal of Economics, Oxford University Press, vol. 33(1), pages 139-159, January.
    7. Jörg Bibow, 2007. "How the Maastricht Regime Fosters Divergence as Well as Instability," Palgrave Macmillan Books, in: Philip Arestis & Eckhard Hein & Edwin Heron (ed.), Aspects of Modern Monetary and Macroeconomic Policies, chapter 11, pages 197-222, Palgrave Macmillan.
    8. C. Naastepad & Servaas Storm, 2006. "OECD demand regimes (1960-2000)," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(2), pages 211-246.
    9. Ozlem Onaran, 2011. "From wage suppression to sovereign debt crisis in Western Europe: who pays for the costs of the crisis?," International Journal of Public Policy, Inderscience Enterprises Ltd, vol. 7(1/2/3), pages 51-69.
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    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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