1. The role of wage policy in Europe: Implications of the wage-led demand regime Ozlem Onaran, Middlesex University and Engelbert Stockhammer, Kingston University

2. Motivation Wage policy – Full employment – Fair and stable income distribution – Balanced international positions Neoclassical/’mainstream’/NCM – Wage flexibility – in theory, wage moderation – in practice – wages merely as a cost item, and ignores the role of wages as a source of demand Post-Keynesian/New Economics – Eurozone: wage-led demand wage moderation→growth↓, unemployment↑ – Productivity-oriented wage policy – coordination of (national) wage bargaining systems – Take into account inflation target and external position – In the € area: higher wages in Germany!

3. 3 Outline What is the effect of a wage cut on demand? Theoretical background –Wage-led vs. profit-led demand regime –Neo-Kaleckian/Post-Keynesian model Empirical literature wage policy in Europe – Imbalances: export-led growth and credit-led growth – Wage coordination

4. 4 Wage share and GDP growth, 1961-2010 Wage share

5. 5 Wage share and unemployment, 1961-2010 unemployment Wage share

6. Model What is the effect of a wage cut on demand? Neo-Kaleckian/Post-Keynesian model pro-capital income distribution: + & - effects on aggregate demand - effect on C: the relative size of the consumption differential out of wage vs. profit income + effect on I: the sensitivity of investment to profits + effect on NX: the sensitivity of net exports to unit labor costs Total effect on demand is ambiguous -: wage-led demand +: profit-led demand Bhaduri and Marglin (1990)

7. 7 Empirical Literature Systems approach (VAR): Deals with simultaneity, weak in identifying effects on C and I (few if any control variables) – small effects (Stockhammer & Onaran 04, US, UK, F; Onaran & Stockhammer 05, Korea, Turkey) or profit-led demand (Barbosa-Filho & Taylor 06, US; Flaschel & Proano 07) Single equation approach: Good in identifying effects, bad in dealing with endogeneity – estimate separate C, I, NX functions. Bowles & Boyer 95; Naastepad & Storm 06; Hein and Vogel 08: OECD6/8 – estimate separate C, I, X, M, P functions Onaran, Stockhammer, Grafl 11, Stockhammer, Onaran, Ederer 09; Ederer & Sto. 07, Sto. & Ederer 08, Sto./Hein/Grafl 10: US, Eurozone, France, Austria, Germany respectively US: effects of financialization Most find wage-led private domestic demand regimes – Onaran et al11, Stockhammer et al09, Storm&Naastepad06, Hein&Vogel08, Sto.&Ste09

8. Empirical findings: Euro area Stockhammer, Onaran, Ederer, CJE 2009 low degree of openness (X/Y: 12%) -> wage-led regime Estimate the effects of functional income distribution consumption, investment and net exports A 1%-pt decrease in the wage share (WS) leads to Consumption ↓ by 0.4%-pt (as a ratio to GDP) Investment ↑ by 0.1%-pt (as a ratio to GDP) Domestic private demand ↓ by 0.3% Net exports ↑ by 0.1%-pt (0.06-0.13%-pt ) Aggregate demand (private) ↓ by 0.2% →EU as a whole has a wage-led demand regime, although some individual member states may have a profit-led regime

9. Wage policy in the Euro area Race to the bottom: declining wage shares (22 wage pacts aimed at improving competitiveness) Fall in wage share has led to a stagnation of domestic demand 2 growth models in response: credit-led and export-led growth → imbalances within the Euro area Credit-ledExport-led Center (US, UK)Germany, Austria (Japan) Periphery Greece, Ireland, Portugal, Spain (China)

10. Germany: GDP, priv. cons., adj WS (1994 = 1)

11. ULC (2000 = 100; AMECO)

12. Current account (% GDP) Current account (% GDP), avg. 2000-07 Germany3.8Greece-8.5 Austria1.7Portugal-8.9 Netherlands5.6Spain-5.8 Italy-1.3 Ireland-2.1

13. Increases in household debt Increase in HH debt (in % GDP) 2000/04 and 2000/08 2000/08 Germany-11.34Ireland61.72 Netherlands29.1Greece18.262000/05 Austria7.21Spain32.53 Italy18.09 Portugal21.31

14. How can the €-zone re-balance? How much rebalancing is necessary? – ULC 25-30% – German wage growth has to be 2.5%-pts. above mediterranean wage growth for 10 years! 1 deflation – Big contraction in PIIGS to bring down GDP and ULC and thus, ultimately, CA-deficit – But: that means rising debt ratios! 2 inflation – Expansion and/or wage inflation in Germany – Higher inflation target in € area!

15. Wage coordination European system of coordinated wage bargaining As part of a new policy economic policy mix Aim: – ensure that living standards of the working class are growing – Prevent excessive inflation – Prevent/counteract imbalances w j = x j + p T + a(ULC EU – ULC j ) – w..wage growth, x..productivity growth, p T..inflation target, ULC..unit labour costs, – Subscripts EU and country j – p T would have to be set such as to avoid deflation in all countries, while allowing rebalancing

16. Wage policy - conclusions Focus on wage flexibility is misplaced – Does not guarantee full employment – Unable to guarantee a fair and stable distr of income – Unable to avoid international imbalances Productivity-oriented wage policy to stabilize effective demand Coordination of wage bargaining systems to prevent a race to the bottom In the Euro area: wage policy has to take into account current account positions To avoid a deflationary adjustment: substantially higher wage growth in Germany (mediterranean wages +3%-pts. for 10 yrs)