The role of institutions in explaining wage determination in the Eurozone: A panel cointegration approach

Abstract

This article estimates the equilibrium wage equation for the Eurozone over the period 1995–2011 using panel cointegration techniques that allow for cross‐section dependence and structural breaks. As expected, the results show that wages have a positive relationship with productivity and a negative relationship with unemployment. The authors also include institutional variables, showing that more flexible labour markets are consistent with wage moderation. They find that, since 2004, increased international competition has made wage determination more strictly related to productivity, and that real exchange rate appreciation triggers a drop in wages. Their results also indicate that government intervention and wage bargaining concertation have a wage‐moderating role.

Differences in wage determination in the Eurozone: A challenge to the resilience of the common currency

“…The apparent sluggishness of Periphery labor markets, on the other hand, might be related to their weak links to macroeconomic fundamentals. In this respect, this analysis complements the results complement the ones in Camarero et al (2016) which showed the wage-moderating role of flexible labor markets. Moreover, while the focus of this paper is wage determination, the broad conclusions support the results of Sapir (2006) related to the differences across EU social and labor market models in terms of efficiency and equity.…”

“…The break in Model 3 is the same as Camarero et al (2016), where the sample period was 1995-2011. In that paper, this break was interpreted as the impact on wage determination of the EU enlargement, which increased competitive pressures on exporters as well as within-Europe migration flows.…”

“…As we acknowledged in Section 2, the proposed specification might present endogeneity issues, in particular as far as the is concerned. For this reason, as a robustness check as in Camarero et al (2016), we also performed our analysis using the nominal effective exchange rate ( ) in place of the real one. 21…”

“…Note that this approach is different from the one we followed inCamarero et al (2016): while in that model institutional variables were included in the long-run relations, and therefore cross-country differences in the wage equation were assumed to be captured by the different labor market institutions, in the present paper we imply that different structures and institutions of the labor market result in long-run heterogeneity.…”

“…In a recent paper, Camarero et al (2016), estimated the wage equation for the euro area using panel cointegration techniques and accounting for labour market institutions, finding that more flexible labour market institutions are compatible with wage moderation, and that, after the Eastern enlargement, the importance of productivity and real exchange rate dynamics in explaining wage developments increased with respect to institutional factors and unemployment. Furthermore, previous research (Arpaia and Pichelmann 2007) has, in fact, shown that labour cost developments in the euro area have not always reflected warranted adjustments, but rather different degrees of wage flexibility across countries.…”