Decressin, Jörg, Espinoza, Raphael, Halikias, Ioannis, Leigh,Daniel, Loungani, Prakash, Medas, Paulo, Mursula, Susanna, Schindler, Martin, Spilimbergo, Antonio, Xu,TengTeng, (2015), “Wage Moderation in Crises-Policy Considerations and Applications to the Euro Area”, IMF, November.
This paper discusses the short-run economic impact of wage moderation and the implications for policy in the context of the euro area crisis, with a focus on the roles of monetary policy and the zero lower bound (ZLB). It explores the channels through which wage moderation affects output, presenting a coherent, multi-country model for the euro area. In an economy hit by a sudden stop of private capital flows, the current account deficit typically contracts, as domestic credit for consumption or investment slows sharply in response to the drop in foreign funding. The task of returning to full employment within a tighter external financing constraint requires both higher domestic and foreign demand. In this context, IMF staff advice usually stresses the benefits of lower interest rates and exchange rate depreciation to boost demand and competitiveness. But for countries in a currency union, such as the euro area, exchange rate depreciation is not available. Instead, lower nominal wage growth—wage moderation—and lower inflation or higher productivity growth relative to trading partners is needed. More generally, the measures aimed at changing the relative prices to regain competiveness when the nominal exchange rate is fixed are often referred to as “internal devaluation.” While internal devaluation could include labor, product, and fiscal measures, this paper focuses solely on labor.
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- B. Bakker, Bas, (2015), ” Employment and the Great Recession : The Role of Real Wages”, IMF publications, 28 October.
- Frimmel, Wolfgang, Winter-Ebmer, Rudolf, (2015), “The contribution of the wage structure to early retirement behaviour”, Voxeu, 28 October.