The Effects of European Economic and Monetary Union on Wage Behaviour

This paper examines the possible consequences of the forthcoming European Monetary Union on wage behaviour. EMU does not influnce wage policy directly, but rather indirectly through its implications on other areas of economic policy, predominantly on monetary policy. Since other adjustment mechanisms shall cease to exist, EMU is expected to imcrease pressure on wage policy to serve as an adjustment mechanism. An empirical analysis of six European countries shows that in the past, Southern countries conducted a much more exopansive policy than northern European countries. However, this competitive disadvantage was more than compensated by exchange rate developments. What will happen when EMU has come into effect? Either the impossibility to devaluate within Europe will induce a shift in competitive positions on favour of Northern European countries, or a change in wage behaviour will occur. An econometric analysis shows that the stability of exchange rates has proven to have a dampening effect on wage increases in the past, particularly in the Southern countries. Whether the extent of this effect will be sufficient to prevent a shift in competitive positions, however, remains to be seen.

Lauer, Charlotte (1999), The Effects of European Economic and Monetary Union on Wage Behaviour, IZA Discussion Papers, Bonn