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Wage Inflation and the Distribution of Output Gaps in Europe: Insiders vs. Outsiders

Author

Listed:
  • M. Demertzis
  • A. Hughes Hallett

Abstract

This paper examines whether Europe's monetary union framework of "ins" and "outs" reflects differences in market structures underpinned by relatively immobile labour. Such a situation could give rise to sufficient nominal convergence to satisfy the entry requirements to EMU, but little real convergence and hence a significant incentive for some to stay outside. Using models of wage leadership vs. locational competition, we examine the extent and strength of integration in labour market costs using a sample of data covering the 1980s and 1990s - i.e. for the run up to EMU. This exposes a conflict between real and nominal convergence which is ultimately incompatible with further integration. The empirical evidence suggests that wage bargainers now appear to focus more on their own domestic market conditions. That may deliver a better economic performance, but little extra integration.

Suggested Citation

  • M. Demertzis & A. Hughes Hallett, 2000. "Wage Inflation and the Distribution of Output Gaps in Europe: Insiders vs. Outsiders," WO Research Memoranda (discontinued) 631, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:631
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    References listed on IDEAS

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    1. Hughes Hallett, A. & Ma, Y. & Melitz, J., 1996. "Unification and the policy predicament in Germany," Economic Modelling, Elsevier, pages 519-544.
    2. Michael Artis & Dilip Nachane, 1990. "Wages and prices in Europe: A test of the German leadership thesis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), pages 59-77.
    3. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    4. Edward H. Gardner & William R. M. Perraudin, 1993. "Asymmetry in the ERM: A Case Study of French and German Interest Rates Before and After German Unification," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 427-450, June.
    5. Brechling, Frank, 1973. "Wage Inflation and the Structure of Regional Unemployment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 355-379, Part II F.
    6. Hughes Hallett, Andrew & Ma, Yue, 1992. "East Germany, West Germany, and their Mezzogiorno Problem: An Empirical Investigation," CEPR Discussion Papers 623, C.E.P.R. Discussion Papers.
    7. Artis, Michael J & Ormerod, Paul, 1991. "Is There an `EMS' Effect in European Labour Markets?," CEPR Discussion Papers 598, C.E.P.R. Discussion Papers.
    8. Thirlwall, A P, 1970. "Regional Phillips Curves," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 32(1), pages 19-32, February.
    9. Bhaskar, V, 1990. "Wage Relativities and the Natural Range of Unemployment," Economic Journal, Royal Economic Society, vol. 100(400), pages 60-66, Supplemen.
    10. repec:cup:macdyn:v:4:y:2000:i:4:p:534-46 is not listed on IDEAS
    11. Demertzis, Maria & Hallett, Andrew Hughes, 1998. "Asymmetric transmission mechanisms and the rise in European unemployment: A case of structural differences or of policy failures?," Journal of Economic Dynamics and Control, Elsevier, vol. 22(6), pages 869-886, June.
    12. Fratianni, Michele & von Hagen, Juergen, 1990. "The European Monetary System ten years after," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 173-241.
    13. Cross,Rod Preface by-Name:Blanchard,Olivier (ed.), 1995. "The Natural Rate of Unemployment," Cambridge Books, Cambridge University Press, number 9780521483308, December.
    14. Hallett, A.J. Hughes, 2000. "Aggregate Phillips Curves Are Not Always Vertical: Heterogeneity And Mismatch In Multiregion Or Multisector Economies," Macroeconomic Dynamics, Cambridge University Press, pages 534-546.
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    Cited by:

    1. Demertzis, Maria & Marcellino, Massimiliano & Viegi, Nicola, 2008. "A Measure for Credibility: Tracking US Monetary Developments," CEPR Discussion Papers 7036, C.E.P.R. Discussion Papers.
    2. Demertzis, Maria & Hughes Hallett, Andrew & Schermer, Nicolien, 2009. "Europeanization or globalization? Transnational wage bargaining and the distribution of activity in European labor markets," The North American Journal of Economics and Finance, Elsevier, vol. 20(2), pages 177-192, August.

    More about this item

    Keywords

    EMU; Unemployment; real vs nominal convergence; locational competition;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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