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Institutions and Wage Formation in the New Europe

Edited by Gabriel Fagan, Francesco Paolo Mongelli and Julian Morgan

Institutions and Wage Formation in the New Europe addresses the role played by institutions in European wage formation with a focus on EMU and institutional change in labour markets.
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Chapter 5: Wage developments in the early years of EMU

Karl Pichelmann


Karl Pichelmann1 INTRODUCTION The formation of EMU was expected to exert a profound impact on the market players, in particular affecting price-setting and wage bargaining behaviour. Economic and Monetary Union has in important ways changed the macroeconomic environment, which is now characterized by a single stability-oriented monetary policy for the euro area and sound national fiscal policies. The debate about the likely impact of EMU on wage formation has centred around three different though interconnected aspects: (i) the necessary degree of nominal wage flexibility to compensate for the loss of the exchange rate instrument; (ii) the direct impact on the wage-setting curve and thus on equilibrium unemployment; and (iii) the impact on labour market institutions, in particular wage bargaining mechanisms. It has been widely held that, in general, EMU should provide improved framework conditions for employment-compatible wage bargaining behaviour as the link between wage and employment trends becomes more evident and stringent. With the bailout option of nominal exchange rate devaluation no longer existing, any substantial error in wage-setting would ultimately translate into deteriorating labour market conditions and painful adjustment thereafter. In EMU it is therefore even more important than in the past for wage developments to be in line with both the macroeconomic framework set at the Community level and the individual country-specific requirements. Thus, employment-friendly wage bargaining behaviour is typically characterized by respect for the following guidelines:2 1. Overall nominal wage developments must be consistent with the goal of price stability. Excessive nominal wage increases triggering inflationary...

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