The diversity of wage regimes: why the Eurozone is too heterogeneous for the Euro

Abstract

Why did the transnational synchronization of wage inflations fail during the first 10 years of the euro? We analyze data from 1999 to 2008 for 12 euro members and estimate increases of nominal unit labor costs both in the overall economy and in manufacturing as dependent variables. While our analysis confirms that differences in economic growth shaped the inflation of labor costs, we add a political-institutional argument to the debate and argue that the designs of the wage regimes had an additional, independent impact. In coordinated labor regimes, increases in nominal unit labor costs tended to fall below the European Central Bank’s inflation target, while in uncoordinated labor regimes, the respective increases tended to exceed the European inflation target. Due to the stickiness of wage-bargaining institutions, the lack of the capacity to synchronize inflation is not likely to disappear in the foreseeable future.