European Wage Dynamics and Spillovers

30 Pages Posted: 27 Aug 2019

See all articles by Y. Sophia Zhang

Y. Sophia Zhang

International Monetary Fund (IMF)

Date Written: July 2019


Wage rises have remained stubbornly low in advanced Europe in recent years, but, at the same time, newer EU members are experiencing rapid wage acceleration. This paper investigates the drivers of this wage divergence. Econometric analysis using error correction models suggests that wage growth responds more quickly to changes in unemployment in the newer EU members than in advanced Europe, where wages are more closely related to inflation and inflation expectations in the short run, implying greater inertia in nominal wage rises in advanced Europe. In the years after the global crisis, this inertia contributed to the build up of a real wage overhang relative to sharply slowing labor productivity, which subsequently dragged on nominal wage rises even as unemployment began to decline. Spillovers of subdued wage growth between euro area countries also weighed on wage rises in advanced Europe.

Keywords: Labor market reforms, Labor markets, Real wages, Labor costs, Labor productivity, wages, spillovers, Phillips curve, non-employment, European Union, wage growth, inflation expectation, Eu member, real wage, euro area

JEL Classification: J3, J60, F22, E2, D4, E31, E01

Suggested Citation

Zhang, Y. Sophia, European Wage Dynamics and Spillovers (July 2019). IMF Working Paper No. 19/156, Available at SSRN:

Y. Sophia Zhang (Contact Author)

International Monetary Fund (IMF) ( email )

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