The Effects of Alternative Wage Regimes in a Monetary Union: A Multi-Country Agent Based-Stock Flow Consistent Model

Abstract

The eurozone crisis has revitalized the debate between economists on the role played by wages in open economies. Salaries paid to workers are at the same time a fundamental source of aggregate demand and a determinant of firms' international cost competitiveness. After presenting the most relevant positions regarding the role of wages in the eurozone crisis, the paper investigates the impact of alternative wage growth patterns in an artificial Monetary Union, by means of simulation experiments conducted with the Agent Based-Stock Flow Consistent (AB-SFC) Multi-Country model presented in Caiani et al. (2017a). Changes in wage growth regimes impact in non-trivial ways on both the demand and supply sides of the economies, combining Keynesian and Schumpeterian effects. When pursued in isolation, both wage inflation and wage moderation strategies are characterized by a trade-off between the external and fiscal stance of the country and the dynamics of real GDP and labor productivity. On the contrary, coordinated wage increases in all member countries benefit the economy without compromising the external balance. Sensitivity experiments show that results are robust to different dimensions of the Monetary Union and that the efficacy of coordinated wage inflationary strategies is enhanced when consumers give more importance to price differentials in their consumption allocation decisions.