Has EMU Had Any Impact on the Degree of Wage Restraint?

Working Paper
06-6
August 2006

Adam S. PosenWage restraint-the degree to which wage increases are commensurate with increases in labor productivity-has either remained unchanged or increased following European Monetary Unification (EMU) in the vast majority of eurozone economies. This finding contradicts the predictions of widely cited models of coordination of wage bargaining that wage restraint would decline after EMU. In particular, under these models, one would have expected wage restraint to decline considerably post-EMU in Germany, but Posen and Gould find no indication of such a decline. Their analysis also shows a significant increase in wage restraint post-EMU in Italy. These results are consistent with the interpretation that greater monetary credibility induced greater wage restraint, as is the increase in wage restraint seen in noneurozone United Kingdom and Sweden after adoption of inflation targeting.