Macroeconomic imbalances in Europe: How to overcome the fallacy of unit labour costs |
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Authors: | Stefan Collignon Piero Esposito |
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Affiliation: | 1. Sant’Anna School of Advanced Studies, Piazza Martiri della Libertà 33, 56127 Pisa, Italy;2. London School of Economics, United Kingdom;3. University of Cassino and Southern Lazio, Department of Economics and Law, Via S. Angelo, 03043 Cassino, Italy;4. LUISS School of European Political Economy, via di Villa Emiliani 14, 00197, Rome, Italy |
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Abstract: | Policy recommendations based on unit labour costs (ULC) indices can lead to undesirable and counterproductive policies, because they do not reveal possible distortions in the base year. In this paper, we discuss the problems with the ULC-current account relation and provide an alternative measure for relative wage costs called Wage Competitive index (WCI) based on the assumption of convergence of the returns on capital. We show how to calculate it and that it is more efficient than traditional ULC and REER indicators. The implication is that policymakers should not focus on nominal wage setting only, but also more broadly on all factors which affect the return on capital. This implies that the well-known Rehn–Meidner rule, which underlies the Macroeconomic Dialogue should be modified. |
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Keywords: | Imbalances Competitiveness Unit labour costs Return on capital Europe Panel data C23 F15 F45 O52 |
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