Economic Growth
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Economic Growth

New Directions in Theory and Policy

Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie

This enlightening and significant volume focuses on the nature, causes and features of economic growth across a wide range of countries and regions. Covering a variety of growth related topics – from theoretical analyses of economic growth in general to empirical analyses of growth in the OECD, transition economies and developing economies – the distinguished cast of contributors addresses some of the most important contemporary issues and developments in the field.
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Chapter 12: The Role of Wage-Setting in a Growth Strategy for Europe

Andrew Watt


1 Andrew Watt INTRODUCTION Economic performance in Europe has been disappointing since 2000, when EU heads of state and government agreed, at the Lisbon European Council, to make the European Union ‘the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion’. In the Euro Area, economic growth averaged just 1.4% from 2001 to 2004, compared with 2.7% from 1996 to 2000. Employment growth in the same periods also halved and the rate of unemployment rose by a full percentage point from an already unacceptably high level. The explanation of this dismal performance offered by mainstream economists, and accepted by parties across much of the political spectrum, is simple: labour market and other institutional imperfections – and thus a ‘lack of structural reform’ – are making it impossible for Europe to compete against more flexible advanced capitalist countries (like the US) and the rising low-wage economies of Asia, while such institutional rigidities raise unemployment by maintaining wages above ‘equilibrium’ levels. Ultimately it matters little that the facts (not least Europe’s rather good economic performance in the late 1990s and the growth and employment patterns within Europe) do not support this simplistic view. European governments, spurred on by the Lisbon Strategy, have embarked on a series of liberalising reforms, particularly in the area of labour market and welfare state institutions. To date these reforms appear, if anything, to have worsened an already difficult situation. At the time of...

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