Economics, Econometrics and Finance
4 years ago

Reducing wages in Euro area could lead to economic downturn, study finds.

RePEc: Research Papers in Economics
Wage Flexibility or Wage Coordination? Economic Policy Implications of the Wage-Led Demand Regime in the Euro Area
Engelbert Stockhammer

Paper Summary

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Wage shares in Europe have decreased due to policies promoting wage flexibility and competition. A system of wage coordination could help shift towards productivity-focused wages, reducing wage competition. Research shows that in the Euro area, a 1% decrease in wage share leads to a 0.2% decrease in demand. This suggests that stable wage shares can help stabilize demand. To counteract the deflationary bias of wage reductions, active fiscal policies and redistribution within the EU are needed. Productivity-oriented wage coordination can help stabilize demand and maintain price stability.