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P. 215
Chapter 4: Restoring Convergence between Member States in the EU and EMU
2.2. Structural factors Chart 14: Nominal unit labour cost and its components —
impacting on employment EA-12 cumulative growth 2001–07
and social divergence
50 Productivity Nominal ULC
An important issue to address is the Compensation per employee Just below 2% per annum cumulative
extent to which nominal unit labour 40
cost growth in the euro area, weak pro-
ductivity growth, limited human capital 30
formation and increasing indebtedness
(of both private and public sectors) has % 20
contributed to diverging socioeconomic 10
performance, and how such develop-
ments may affect upward convergence 0
in the future.
-10
Since a currency union implies irrevers- IE ES EL IT PT LU NL FR BE FI AT DE
ible nominal exchange rates, Member Source: DG EMPL calculations based on Eurostat (nama_aux_lp and nama_aux_ulc).
States are No longer able to adjust rel- Note: Just below 2 % per annum increase is set at 1.95 %.
ative prices and wages via changes in
the nominal exchange rate in the face of
economic shocks and competitive chal- divergence in nominal unit labour cost Greece, Italy and Portugal ( ). In contrast,
16
lenges, and have to make adjustments in growth across Member States of a cur- Germany and to a lesser extent Austria
terms of prices and nominal unit labour rency union (with irreversible nominal and Finland, undershot this benchmark.
costs (reflecting changes in nominal exchange rates) is unsustainable. These divergent developments led to an
wages and productivity). However, expe- unsustainable distortion of competitive-
rience shows that these adjustments are While changes in nominal compensa- ness within the euro area.
generally slow to take place (see below) tion are often seen as one way to cor-
with the inevitable risk that this may trig - rect such developments, at least in the However, while divergent development
ger increases in unemployment. short run, the following analysis shows in nominal unit labour costs may impact
that strengthening labour productivity directly on a country’s competitiveness,
15
The first subsection reviews trends in (in a sustainable way ( )) is necessary it is primarily driven by developments in
dispersion of nominal unit labour cost in order to both restore external balance labour productivity and nominal compen -
growth in the euro area, both during the and promote upward convergence. sation per employee. In Italy and Spain,
run-up to the crisis and since then. for example, it was largely driven by rela -
Divergence in unit labour costs tively weak productivity growth. In con-
The second subsection reviews major during the run-up to the crisis … trast, Greece and Ireland (together with
drivers of potential divergence in human Finland) showed the strongest increases
capital formation, in terms of possible In the run-up to the crisis (i.e. the 2001–07 in productivity and also recorded much
impact on productivity growth, notably period) there was a strong divergence in stronger than average increases in nomi -
developments for early school leavers, nominal unit labour cost (ULC) growth nal compensation per employee. At the
thereby complementing the analyses across the euro area (see Chart 14). More same time Germany, and to a lesser
provided in the other chapters of this particularly, taking growth of just below extent Austria, showed fairly robust
review (see Chapter 2). 2 % per year (i.e. the ECB’s inflation tar- productivity growth in combination with
get, since if real wages grow in line with relatively weak growth in nominal com-
The third subsection reviews debt level productivity developments, nominal ULCs pensation per employee.
trends, during the run-up to the crisis, will grow at the same rate as nominal
with increases across the EU, notably prices), several Member States greatly Correcting such divergent develop-
reflecting in some euro-area Member exceeded this benchmark, particularly ments across Member States can be
States strong decreases in nominal inter - Ireland, Spain and, to a lesser extent, approached in different ways, with dif-
est rates, which may also hinder conver - fering impacts on convergence. Nominal
gence across Member States. ( ) Labour productivity measures output per unit wages can be reduced in the Member
15
of labour input. The rule that productivity States with excessive nominal unit labour
2.2.1. Productivity matters is calculated as GVA divided by the number cost growth, or increased in the States
of employed persons is an accounting rule
for nominal unit labour which does not constitute a behavioural with relatively weak nominal unit labour
relationship that indicates a direction of
cost divergence across causality, i.e., it still allows that causality cost growth. While this may restore inter -
the euro area runs from (predetermined) productivity national competitiveness ( ), it will not
17
and GVA to a (endogenous) number of
employed persons, from (predetermined)
Developments in nominal unit labour GVA and number of employed persons ( ) Among the EA-12 Member States that were
16
to (endogenous) productivity, or from
cost, which measures nominal compen- (predetermined) productivity and number members of the euro area over the entire
period.
sation per employee adjusted for pro- of employed persons to (endogenous) GVA. ( ) It can notably be noted that an additional
17
While the latter adjustment is underpinned
ductivity, may lead to inflationary (or by structural developments, the two other element for consideration lies in the average
deflationary) cost-push pressures in an adjustment schemes may reflect cyclical development in unit labour costs of the euro
zone as a whole, as compared with the ones
behaviour in GDP and structural rigidities in
economy. Clearly, in the long-run, strong labour markets. in the main trading partners.
213
2.2. Structural factors Chart 14: Nominal unit labour cost and its components —
impacting on employment EA-12 cumulative growth 2001–07
and social divergence
50 Productivity Nominal ULC
An important issue to address is the Compensation per employee Just below 2% per annum cumulative
extent to which nominal unit labour 40
cost growth in the euro area, weak pro-
ductivity growth, limited human capital 30
formation and increasing indebtedness
(of both private and public sectors) has % 20
contributed to diverging socioeconomic 10
performance, and how such develop-
ments may affect upward convergence 0
in the future.
-10
Since a currency union implies irrevers- IE ES EL IT PT LU NL FR BE FI AT DE
ible nominal exchange rates, Member Source: DG EMPL calculations based on Eurostat (nama_aux_lp and nama_aux_ulc).
States are No longer able to adjust rel- Note: Just below 2 % per annum increase is set at 1.95 %.
ative prices and wages via changes in
the nominal exchange rate in the face of
economic shocks and competitive chal- divergence in nominal unit labour cost Greece, Italy and Portugal ( ). In contrast,
16
lenges, and have to make adjustments in growth across Member States of a cur- Germany and to a lesser extent Austria
terms of prices and nominal unit labour rency union (with irreversible nominal and Finland, undershot this benchmark.
costs (reflecting changes in nominal exchange rates) is unsustainable. These divergent developments led to an
wages and productivity). However, expe- unsustainable distortion of competitive-
rience shows that these adjustments are While changes in nominal compensa- ness within the euro area.
generally slow to take place (see below) tion are often seen as one way to cor-
with the inevitable risk that this may trig - rect such developments, at least in the However, while divergent development
ger increases in unemployment. short run, the following analysis shows in nominal unit labour costs may impact
that strengthening labour productivity directly on a country’s competitiveness,
15
The first subsection reviews trends in (in a sustainable way ( )) is necessary it is primarily driven by developments in
dispersion of nominal unit labour cost in order to both restore external balance labour productivity and nominal compen -
growth in the euro area, both during the and promote upward convergence. sation per employee. In Italy and Spain,
run-up to the crisis and since then. for example, it was largely driven by rela -
Divergence in unit labour costs tively weak productivity growth. In con-
The second subsection reviews major during the run-up to the crisis … trast, Greece and Ireland (together with
drivers of potential divergence in human Finland) showed the strongest increases
capital formation, in terms of possible In the run-up to the crisis (i.e. the 2001–07 in productivity and also recorded much
impact on productivity growth, notably period) there was a strong divergence in stronger than average increases in nomi -
developments for early school leavers, nominal unit labour cost (ULC) growth nal compensation per employee. At the
thereby complementing the analyses across the euro area (see Chart 14). More same time Germany, and to a lesser
provided in the other chapters of this particularly, taking growth of just below extent Austria, showed fairly robust
review (see Chapter 2). 2 % per year (i.e. the ECB’s inflation tar- productivity growth in combination with
get, since if real wages grow in line with relatively weak growth in nominal com-
The third subsection reviews debt level productivity developments, nominal ULCs pensation per employee.
trends, during the run-up to the crisis, will grow at the same rate as nominal
with increases across the EU, notably prices), several Member States greatly Correcting such divergent develop-
reflecting in some euro-area Member exceeded this benchmark, particularly ments across Member States can be
States strong decreases in nominal inter - Ireland, Spain and, to a lesser extent, approached in different ways, with dif-
est rates, which may also hinder conver - fering impacts on convergence. Nominal
gence across Member States. ( ) Labour productivity measures output per unit wages can be reduced in the Member
15
of labour input. The rule that productivity States with excessive nominal unit labour
2.2.1. Productivity matters is calculated as GVA divided by the number cost growth, or increased in the States
of employed persons is an accounting rule
for nominal unit labour which does not constitute a behavioural with relatively weak nominal unit labour
relationship that indicates a direction of
cost divergence across causality, i.e., it still allows that causality cost growth. While this may restore inter -
the euro area runs from (predetermined) productivity national competitiveness ( ), it will not
17
and GVA to a (endogenous) number of
employed persons, from (predetermined)
Developments in nominal unit labour GVA and number of employed persons ( ) Among the EA-12 Member States that were
16
to (endogenous) productivity, or from
cost, which measures nominal compen- (predetermined) productivity and number members of the euro area over the entire
period.
sation per employee adjusted for pro- of employed persons to (endogenous) GVA. ( ) It can notably be noted that an additional
17
While the latter adjustment is underpinned
ductivity, may lead to inflationary (or by structural developments, the two other element for consideration lies in the average
deflationary) cost-push pressures in an adjustment schemes may reflect cyclical development in unit labour costs of the euro
zone as a whole, as compared with the ones
behaviour in GDP and structural rigidities in
economy. Clearly, in the long-run, strong labour markets. in the main trading partners.
213
