Differences in wage determination in the Eurozone: A challenge to the resilience of the common currency

Abstract

Different developments in wages and unit labor costs across countries can reduce the synchronization of business cycles within a currency area and therefore be a potential source of asymmetric shocks and/or asymmetric response to a common shock. In this paper, we use novel econometric methods to identify differences and similarities in wage determination across Eurozone countries. Results show that wages have different determinants across euro area countries, among which two relatively distinct groups can be identified. In particular, wages in Germany, Austria, Belgium, Luxembourg, the Netherlands and Finland behave more similarly, are less sticky and respond more to macroeconomic conditions than those in the group composed of Italy, Spain, Portugal, France and Ireland. Moreover, the equilibrium wage has been affected by a structural change contemporaneous to the international financial crisis. Finally, structural reforms since the euro crisis have contributed to make labor market structures in Eurozone countries more similar, which contributed to improve the resilience of the Eurozone, but the job is not completed yet.