Real Unit Labor Costs Differentials in EMU+L4700: How Big, How Benign and How Reversible?
IMF Working Papers, May 1, 2011
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- Real Unit Labor Costs Differentials in EMU+L4700: How Big, How Benign and How Reversible?
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Bibliographic details
- Authors: Igor Lebrun, Esther Perez Ruiz
- Published: May 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455261383.001
Overview
- Authors: Igor Lebrun, Esther Perez Ruiz
- Date: May 1, 2011
- Core question: Causes and persistence of real unit labor costs (RULC) growth differentials among euro area members since EMU began, and their evolution up to the crisis.
- Central conclusion: Persistent RULC growth differentials can be attributed to structural heterogeneity across countries and an increased sensitivity of RULC to fundamentals after the shift in the monetary regime. Policy actions toward more homogenous regulation across the euro area can significantly reduce these differentials.
Key empirical findings
- Persistent RULC growth differentials between euro area members have existed since the start of EMU and widened in the run-up to the crisis.
- Empirical attribution of persistent RULC growth differentials includes:
- Divergent evolutions in capital-output ratios.
- Divergent nominal effective exchange rates.
- Country-specific institutional features.
- Increased sensitivity of RULC to fundamentals following the shift in the monetary regime.
- Implication: Because part of RULC growth discrepancies arises from heterogeneous structural characteristics, policy harmonization can materially reduce disparities.
Drivers of RULC differentials (as identified in the paper)
- Capital-output ratio divergences.
- Nominal effective exchange rate movements that differ across countries.
- Country-specific institutional features (e.g., labor and product market institutions, wage-setting mechanisms).
- A regime shift in monetary policy that heightened RULC responsiveness to fundamentals.
Policy recommendations and implications
- Policy action aiming for more homogenous regulation across the euro area can make a significant contribution to reducing RULC growth discrepancies.
- Addressing heterogeneous structural characteristics (capital productivity, institutional frameworks) is central to diminishing persistent RULC differentials.
Content in this bundle
- Appendix 1. Model Predictions