Can Wage Restraint Pull the Mediterranean Countries Out of the Sovereign-Debt Crisis? An Empirical Analysis of OECD Export Performance

Can Wage Restraint Pull the Mediterranean Countries Out of the Sovereign-Debt Crisis? An Empirical Analysis of OECD Export Performance

Li, Y.

Kleinknecht, A. (mentor)
Storm, S. (mentor)
Molin, E. (mentor)

Technology, Policy and Management

Innovation Systems Department

Economics of Innovation

2012-08-23

On March 25th 2011, the European Council passed the Euro-plus Pact in order to enhance the competitiveness of European countries especially for the four Mediterranean countries which were trapped in a sovereign-debt crisis. One of the main focuses of the Pact was to restrain the growth rate of wages to make it below the growth rate of productivity. The introduction of this so-called ‘competitiveness pact’ aroused widely debate on the effectiveness of the wage restraint and some fairness issues within Euro system. This paper aims to figure out whether wage restraint can help the debt-trapped countries out of trouble. We first divided the European countries into two groups: North and South and then implemented the research by three main parts: facts overview, theoretical analysis and empirical analysis. In the facts part, plenty of macroeconomics indicators have been presented and compared between countries and over times to provide a clear view on the current crisis in Europe and differentiations in economic performance across countries. Great differences have been found in economic indicators like trade balance, export performance, government debt ratio, etc. in which the North shows better results than the South. There are also distinctions between countries in export patterns and commodity structures. The North focuses more on relative higher technology industries while the South more on the lower ones. For the theoretical part, the model of Fagerberg (1988) has been used combining with a Ricardian Model to describe the relation between export shares and possible impact factors such as labor costs, technology progress, technical change and other country specific factors. In the empirical part, quantitative relations are found within a panel dataset across 15 OECD countries and 24 industries (classified under ISIC Rev.3) over 12 years from 1995 to 2006. Compared to the Mediterranean countries, Germany has stronger cost competitiveness coming from its strongly increasing labor productivity rather than wage moderation. However, the labor productivity can also partially attribute to the technology competitiveness which in our analysis shows weak direct influence on export performance. Country specific factors play an important role in explaining the variations in export market shares but it is hard to find good indicators for them. Even though nominal wages in the South were rising significantly stronger than the North (represented by Germany), wages are not the core reason which deteriorates the cost competitiveness in the Mediterranean countries but the slow productivity growth. Structural competitiveness cannot be ignored due to its potential impact on policy making but needs further research.

Sovereign-Debt Crisis
RULC
International Competitiveness

http://resolver.tudelft.nl/uuid:81e4f4f0-847c-4805-b9f4-24e045162485

2012-08-23

Student theses

master thesis

(c) 2012 Li, Y.