Greek Export and Labor Market Performance: Facts and Myths that Can Help Devise a Useful Growth Strategy

Abstract

The Greek paradox of falling wages that do not lead to increased exports can be reconciled with standard economic theory, once a number of facts are taken into account. Actually, exports of goods that have not been facing the additional adverse effect of highly increased after tax energy prices for industrial users have been increasing steadily during the crisis. In addition, once the collapse of the economy was well under way, labour market reforms in Greece introduced flexibility that stabilized employment, especially among SME’s. At the same time in spite of modest product market reforms the increasing distortions of a tax system that overtaxes honest productive individuals and businesses, which are by definition more likely to be engaged in businesses that offer higher value tradable goods, further undermined growth and export prospects. Finally, real interest rates on corporate loans, wages and the efficiency of product markets are found to have an important impact on manufacturing employment. Product market reforms and reducing uncertainty thus emerge as key policy priorities if the increase in employment, export performance and wages are a desired policy priority.