International Competitiveness: the reduction of wages is the solution?

This paper is intended as a first approach to effectiveness of the wage reduction in promoting the international competitiveness of the Portuguese economy. It is general knowledge that the promotion of international competitiveness can be promoted by three distinct pathways. The first is to reduce costs of production factorial resources, including labor costs, generating a decrease in unit cost per unit of final product. The second is based on increasing production with no change of the resources used, which is effective in increasing the productivity of each unit of productive factor used. The third result of product differentiation in order to reduce the international competitors. While the first approach only results in cost reduction, the following two results of the scale effect of investment in promoting the motivation of workers and the reorganization of business structures on the one hand, and changing the production structure and the products created by other side. By requiring a significant investment, hardly achievable today in the Portuguese economy, the latter two alternatives have not been discussed recently by the Portuguese political and economic actors. Using a general equilibrium model to test different proposals to cut wages in different combinations of the sectors we examine the respective effects on the competitiveness of the Portuguese economy. The results of the first simulations show that the reduction of wages in all sectors can lead to negative effects on international competitiveness of Portugal albeit very small. According to several authors, including IMF staff, the distinction between sectors of tradable goods and non-tradable goods can be the key to the solution of the Portuguese problem.