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

Research output: Working paper

Ozlem Onaran, Engelbert Stockhammer

Original languageUndefined/Unknown
Place of PublicationKingston upon Thames, U.K.
PublisherFaculty of Arts and Social Sciences, Kingston University
Published2011

Publication series

NameEconomics Discussion Paper
PublisherFaculty of Arts and Social Sciences, Kingston University

King's Authors

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. The 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.

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