Labor Costs, Unemployment and Innovation

Abstract

After a short period of wage restraint some observers have argued in the press that rising wage increases would be appropriate both for Germany and the EU. In brief the argument says that higher wage rates will lead to rising aggregate demand and higher investment plus productivity improvements which could even reinforce the current account position. The counterposition emphasizes that in Germany and other EU countries labor costs are too high for full employment. In a post-1999 “Euro region” wage costs relative to the US and other third countries could be too high to achieve the improvement in the net export position that is necessary for a rise in employment in Europe; wage costs could also be too high to stimulate employment growth in the EU nontradables sector.