## European Wage Dynamics and Spillovers

_IMF Working Papers, July 19, 2019_

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**Canonical URL:** [European Wage Dynamics and Spillovers](https://www.imf.org/en/publications/wp/issues/2019/07/19/european-wage-dynamics-and-spillovers-46986)

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## Bibliographic details
- Authors: Yuanyan S Zhang
- Published: July 19, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498319294.001

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### Overview
- Author: Yuanyan S Zhang
- Publication date: July 19, 2019
- Series: Working Paper No. 2019/156
- Pages: 29
- Volume: 2019
- Issue: 156
- DOI: https://doi.org/10.5089/9781498319294.001
- ISBN: 9781498319294
- ISSN: 1018-5941

### Key findings
- Wage rises have remained stubbornly low in advanced Europe in recent years, while newer EU members are experiencing rapid wage acceleration.
- Econometric analysis using error correction models suggests that:
  - Wage growth responds more quickly to changes in unemployment in the newer EU members than in advanced Europe.
  - In advanced Europe, wages are more closely related to inflation and inflation expectations in the short run, implying greater inertia in nominal wage rises.
- In the years after the global crisis, wage inertia in advanced Europe contributed to the build up of a real wage overhang relative to sharply slowing labor productivity, which subsequently dragged on nominal wage rises even as unemployment began to decline.
- Spillovers of subdued wage growth between euro area countries also weighed on wage rises in advanced Europe.

### Thematic analysis (drivers and mechanisms)
- Labor market responsiveness:
  - Newer EU members: faster wage adjustment to unemployment changes.
  - Advanced Europe: stronger short-run link between wages and inflation/inflation expectations; greater nominal wage inertia.
- Real wage and productivity dynamics:
  - Post-global crisis period featured sharply slowing labor productivity.
  - Real wage overhang emerged relative to productivity, constraining subsequent nominal wage growth despite falling unemployment.
- Cross-country spillovers:
  - Subdued wage growth in some euro area countries transmitted to other advanced European economies, further weighing on overall wage rises.

### Subject classification and keywords
- Subject: Labor, Labor markets, Real wages, Unemployment, Unemployment rate, Wages
- Keywords: D. wage outlook, EU member, Euro Area excl. Germany, European Union, Global, growth dynamics, Labor markets, non-employment, pay, Phillips curve, Real wages, spillovers, SpilloversEuropean wage dynamics, trend labor productivity, Unemployment, Unemployment rate, wage acceleration, wage growth, wage rise, wages, WP

*Source: IMF Working Paper "European Wage Dynamics and Spillovers" (Working Paper No. 2019/156) by Yuanyan S Zhang, July 19, 2019.*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/07/19/european-wage-dynamics-and-spillovers-46986_