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Empirica

, Volume 45, Issue 2, pp 395–408 | Cite as

‘Old’ Europe’s wage dynamics and trade imbalances: Is there a link?

  • Leon Podkaminer
Original Paper

Abstract

No evidence is found that gains in relative labour productivity have had a positive effect on the trade balance/GDP ratio for the ‘old’ EU members (excluding Germany) from 1961 to 2014. Rising relative wage rate is shown to have had strong—and negative—effects on the trade balance/GDP ratio for the EU-14, at least in the longer run. It follows that external rebalancing may be achieved through a sufficiently strong fall in the relative wage rates, without productivity changes having a role to play. This is not to claim that the EU-14 (and its members suffering trade deficits in particular) ought to attempt the devastating policy of ‘internal devaluation’. A constructive alternative would be to achieve the fall in the relative wage rates through faster growth of German nominal wage rates. Whether that alternative is practicable is another matter. But it can be argued that without that alternative being followed the European Union will remain a stagnant area plagued by recurrent crises caused by imbalanced trade among its Member States.

Keywords

European Union Trade imbalances Relative wages Relative productivities 

JEL Classification

F14 F41 F24 

Notes

Acknowledgements

The author is grateful to two anonymous referees for helpful comments and suggestions.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.The Vienna Institute for International Economic StudiesViennaAustria

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