Stockhammer, Engelbert and Onaran, Özlem ORCID: https://orcid.org/0000-0002-6345-9922 (2012) Rethinking wage policy in the face of the Euro crisis. Implications of the wage-led demand regime. International Review of Applied Economics, 26 (2). pp. 191-203. ISSN 0269-2171 (Print), 1465-3486 (Online) (doi:10.1080/02692171.2011.631903)

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Abstract

Ten years after its introduction, the Euro is in an existential crisis. The crisis is the outcome of economic policies that have aimed at labour market flexibility and financial integration. This paper argues, firstly, that the aggregate demand regime in the Euro area is wage led. While an increase in wages (other things equal) does have a negative effect on investment and on net exports, it does have a positive effect on consumption. As the Euro area is a relatively closed economy, the consumption effect overpowers the investment effect and the export effect. Secondly, we argue that in the Euro area two growth models have emerged: a credit-led and an export-led model. These have given rise to the imbalances that are at the heart of the Euro crisis. Wage flexibility has proven insufficient to prevent these imbalances. Thirdly, we advocate a system of coordinated wage bargaining that aims at wages rising in line with productivity growth and a substantially upward-revised inflation target. If the project of European economic integration is to survive, it needs a drastic change in direction. An important building block of this redirection is a rethinking of the role of wage policy.

Item Type:	Article
Additional Information:	[1] In International Review of Applied Economics, Volume 26, Issue 2, 2012 - Special Issue: Economic Policies of the New Thinking in Economics. [2] An earlier version of this paper was presented at the conference Economic Policies of the New Thinking in Economics, Cambridge, April 2011.
Uncontrolled Keywords:	Euro crisis, European integration, wage policy, Keynesian economics, E12, E20, E24, E42, E61
Subjects:	H Social Sciences > HG Finance
Faculty / School / Research Centre / Research Group:	Faculty of Business
Related URLs:	Publisher
Last Modified:	14 Oct 2016 09:22
URI:	http://gala.gre.ac.uk/id/eprint/8996

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