ABSTRACT
In Germany in 2003–2005, labour market reforms (discussed in chapter 10) contributed to an improvement in the economy’s competitiveness. The other, no less important contributor to that improvement was the very fast wage growth in other eurozone countries during that time. However, when wages in a country’s trading partners are growing very slowly, an improvement in international competitiveness without a national currency requires a reduction in nominal wages, which is a Herculean task. The experience of the US is instructive; academic research indicates that in the case of regional crises, seen in local unemployment growth, the subsequent drop in unemployment in American regions occurs not as a result of a reduction in local wage levels, meaning a successful “internal devaluation,” but because job seekers migrate to other parts of the country. A vivid illustration could be the case of Detroit.
Structural reforms that make labour markets more flexible are important. But they are unlikely to facilitate downward elasticity of wages to such an extent that in a crisis situation a smooth reduction of wages would allow an economy to regain competitiveness.
