On Wage Formation, Wage Flexibility and Wage Coordination: A Focus on the Wage Impact of Productivity in Germany, Greece, Ireland, Portugal, Spain and the United States

Abstract

This paper discusses the endeavours of policy makers to come to some degree of wage coordination among EU countries, aiming at aligning wage growth with labour productivity growth at the national levels. In this context, we analyse the wage and productivity developments in Germany, the European Union’s periphery countries Greece, Ireland, Portugal, and Spain along with the US for the period 1980-2010. Apart from the contribution of productivity to wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated non-linear wage equation resulting from a wage bargaining model. We further study the downward rigidities of wages in depth. The findings show that in past times of low productivity, price inflation and reductions in unemployment put significant upward pressure on wage growth, also in the low inflationary period of the 2000s. Greece, Ireland, Portugal and Spain are far from aligning wage growth with productivity growth. German productivity is a major German wage determinant, but surely not the only one. To steer wages, policy makers can effectively use the replacement rate.

Keywords: wages, compensation per employee, unit labour costs, productivity, wage formation, wage coordination, labour market, wage flexibility, unemployment, prices, replacement rate, monetary union

JEL Classification: C22, E5, E6, E24, J30