Currency regime crises, real wages, functional income distribution and production

Abstract

This study examines 28 selected cases of transition from a fixed to a more flexible exchange rate combined with devaluation over the period 1980-2013. The crises examined generally prove to be significantly correlated to a reduction in real wages and the wage share. However, both groups are also characterised by an important degree of variability with respect to sample averages, which suggests that the dynamics of real wages and wage shares were also influenced by the specific institutional and political environments in which such crises and devaluations took place. Finally, there appear to be no adequate empirical grounds for the claim that a decrease in real wages resulting from a currency regime crisis will result in improved levels of production and employment. All evaluations of the links between the currency regime and the dynamics of wages and distribution should in any case be carried out not in abstract terms but by comparing the possible implications of abandoning the regime with those of maintaining it. The opportunity of a comparative analysis also applies to the study of current episodes, such as the eurozone crisis. operation has been repeated, taking into account the episodes amongst these for which the relevant data are available. (The figures are missing for real wages in Ecuador and real wages and the wage share in Hungary for the years before 1995.). 11. More specifically, the tests performed suggested that, in all three country groups, equation (3) must include the contemporary rate of growth of GDP. By contrast, in equation (4) the growth rate of GDP can be explained by its own lagged value and by the contemporary growth rate of real wages. Currency regime crises, real wages, functional income distribution and production 269

The Effects of a Euro Exit on Growth, Employment, and Wages

“…Now, in the historical experience that we are considering there was an average fall against the dollar of 558%, which means that the currency crises led to a depreciation of the currency involved in the crisis of five and a half times compared to the dollar (Table 1). But 5 This is the approach suggested by Brancaccio and Garbellini (2015). 6 Naturally, for the main eurozone countries, what has happened in the past in high-income countries is particularly significant.…”