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Do Unit Labor Costs Matter? A Decomposition Exercise on European Data

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  • Sophie Piton
Abstract
From the introduction of the Euro up to the 2008 global financial crisis, macroeconomic imbalances widened among Member States. This divergence took the form of strong differences in the dynamics of unit labour costs. This paper asks why this happened. Is it the result of distortionary public spending, or the consequence of economic integration? To answer this question, this paper builds a theoretical framework that is able to provide a decomposition of unit labour costs growth into various effects of economic integration and policy intervention. Using a novel dataset, it then measures the contribution of each effect to the dynamics of unit labour costs in 12 countries of the Euro area from 1995 to 2014. Results show that trade and financial integration are significant drivers of unit labour costs divergence. Before the global financial crisis, in Greece and Portugal for example, trade and financial integration explain up to 30% of the increase in unit labour costs relative to core countries. On the contrary, distortionary public spending plays a minor role. These results suggest that, in peripheral economies, increasing unit labour costs reflect more the process of real convergence than fiscal profligacy.

Suggested Citation

  • Sophie Piton, 2018. "Do Unit Labor Costs Matter? A Decomposition Exercise on European Data," Working Papers 2018-07, CEPII research center.
    • Handle: RePEc:cii:cepidt:2018-07
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    Cited by:

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    2. Davin, Marion & Gente, Karine & Nourry, Carine, 2018. "How crucial are preferences for non-tradable goods and cross-country sectoral TFP gap for integration?," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 166-181.
    3. Thomas Grjebine & Jérôme Hericourt & Fabien Tripier, 2019. "Sectoral reallocations, real estate shocks and productivity divergence in Europe: a tale of three countries," Post-Print hal-02501064, HAL.
    4. Claire Giordano, 2023. "Revisiting the real exchange rate misalignment‐economic growth nexus via the across‐sector misallocation channel," Review of International Economics, Wiley Blackwell, vol. 31(4), pages 1329-1384, September.
    5. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," Working Papers hal-04141675, HAL.
    6. Florian Morvillier, 2020. "Robustness of the Balassa-Samuelson effect: evidence from developing and emerging economies," EconomiX Working Papers 2020-18, University of Paris Nanterre, EconomiX.
    7. Niels Gilbert & Sebastiaan Pool, 2020. "Sectoral allocation and macroeconomic imbalances in EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(4), pages 945-984, November.
    8. Ivens, Annika, 2018. "Fiscal devaluation in the Euro area: The role of rigidities, non-tradables, and social security contributions," Journal of International Money and Finance, Elsevier, vol. 87(C), pages 62-81.
    9. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," EconomiX Working Papers 2018-51, University of Paris Nanterre, EconomiX.

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    More about this item

    Keywords

    Economic Integration; Productivity; Structural Change; Non-tradable Sector; Macroeconomic Imbalances; Capital Flows; Growth Accounting; Euro Area;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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