Since the start of the Eurozone, there have been major imbalances in unit labour costs (ULC), an indicator of productivity, across member countries. ULC has been lowest in Germany, and highest in peripheral countries like Greece and Ireland.
In order to regain competitiveness, experts argue that the peripheral economies face a long period of disinflation i.e. slowdown in prices of goods and services.
SocGen analyst Klaus Baader explains:
“Part of this perception about time frame is the notion that speedy adjustment is not likely on either side: core economies are seen to have a high degree of price and wage stability, ruling out strong growth in compensation, while the scope for downward adjustment in wages in peripheral economies is seen to be ruled out by nominal wage rigidities (i.e. an institutional inability to reduce nominal wages).”
However, Baader says assumptions about wages in core and peripheral economies are more perceived, rather than real.
“However, evidence is accumulating to suggest that both these concerns are misplaced. In Q2 2011 (latest data) Germany exhibited the fastest hourly wage growth anywhere in the euro area outside of Slovakia, and at 4.8% yoy substantially higher than the euro area average of 3.6%. Austria, too, which experienced very low ULC growth in the first 10 years of EMU, is showing above average increases (4.0%)”
Remember, Merkel has been pushing for higher incomes in Germany, while ECB president Jean Claude Trichet has argued against it saying it would drive inflation in the region.
“Meanwhile, at the other end of the spectrum, the weak peripheral economies are undergoing sharp reductions in wages, in defiance of the notion of nominal wage rigidity. In Greece and Ireland wage growth was running at -3.7% and -3.5% yoy – and note that these figures exclude public administrations, where substantial wage cuts have been implemented. So, the steep declines in ULC in Ireland and Greece were the result of both higher labour productivity – achieved mostly through redundancies – and lower wages. In Portugal, wage growth has also dipped into negative territory in the most recent quarter, and has averaged zero in the first half of the year”
Baader is more optimistic on the time frame:
“It of course depends on many variables: wage and labour productivity growth, which in turn depends on output growth and employment and a host of other factors. Still if we were to hazard a guess based on existing trends, it appears that Irish ULCs, which have been adjusting at the most rapid rate, could be down to the euro area average within one year. In Greece the process has been far slower and much more uneven, making extrapolation difficult. Looking at the more recent past (the past year), Greece could be back to the euro area average within 2 years.”
Now here is a chart on hourly wage growth across the euro area:
Photo: Societe Generale
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