The Role of Wage Policy after the Introduction of Monetary Union

Abstract

With the introduction of European Economic and Monetary Union (EMU), wage policy is being allocated a decisive role in the EU member states. With the loss of sovereignity over an independent monetary policy and an independent currency, differences in inflation rates in tradable goods between the individual countries are no longer possible. If regional competitiveness is not to be endangered, in a monetary fully integrated market nominal wage increases are limited by the expected productivity growth in the home country and the trend of unit labour costs in the other countries. This restriction is also true for social security systems, which are financed by employers contributions: if contribution rates rise, wage policy must take such increases into account so as not to affect unit labour costs. Sanctions in the case of damage to price stability, which manifests itself in rising unemployment, no longer occur with a pronounced delay (as would be the case with national monetary policy, which may initially tolerate a higher inflation rate and only later takes a restrictive course) but immediately, with the loss of regional competitiveness. This increases the pressure for fast wage adjustment. Furthermore, European monetary policy imposes a more general restriction for wage policy throughout Europe. The relationship between wage policy and monetary policy, which used to be determined at the national level for countries with independent currencies, will now be determined at the European level.