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The consensus in the empirical literature is that higher wage growth does not cause higher inflation. Theory of the inflation process is caused by excess aggregate demand. It argues that expansionary monetary policy increases aggregate demand, putting upward pressure on prices. The econometric literature has typically studied whether wage growth Granger-causes inflation. Most studies have not found any strong indications that this is the case (Hess and Schweitzer 2000). According to the Phillips curve, high employment levels are accompanied by high inflation. Any increase in costs like that by growing wages will be fully translated into increases in prices but will not be accompanied by higher output levels.

This chapter presents empirical evidence for the two institutional linkages: that the European Economic and Monetary Union (EMU) led to a bifurcation in sectoral wage developments within its member states and that, despite this bifurcation, employers in northern EMU economies utilized corporatist bargaining arrangements to persistently undercut the trade performance of their southern EMU neighbors after 1999. Using a panel analysis of seventeen OECD countries from 1980 to 2007, the chapter tests the correlation between inflation-averse central banks at the national level and the Maastricht conditionality, on the one hand, and sectoral wage inflation and wage growth, on the other. It also examines the link between sheltered sector wage suppression and export success and shows that export-favoring wage governance institutions helped maintain competitiveness for countries that possessed them; the effect of these institutions on export growth was particularly magnified under monetary union.

This book explores how the European Economic and Monetary Union (EMU) succumbed to the serious economic crisis it is currently in, arguing that the crisis is related to the recent rise in the external imbalances of EMU's member-states under monetary union. It attributes EMU's current crisis, and the growing external imbalances between its member-states that helped produce it, to structural flaws in the governance of labor markets that are present in EMU's institutional design. Focusing on the experiences of Denmark, Germany, Ireland, Italy, Spain, and the Netherlands, the book asks why EMU's core economies have emerged from the sovereign debt crisis with little speculative pressure. This chapter discusses inflation and wage growth convergence in Europe before the creation of the EMU and explains the origins of the crisis using the fiscal and competitive hypotheses. It also considers gaps in the competitiveness hypothesis and provides an overview of the book's structure.

This chapter, which describes the structure of wages within and between Italian firms in the 1990s, shows that firms do not follow a pay compression model in their wage policy. Firm wage policy matters in shaping the wage level distribution and also the wage change distribution. Low-wage firms almost always exhibit the highest positive net flows, which is consistent with what is observed in other countries. The link between firm size and within-firm individual seniority is positive, and exit rates decline as wages increase. In Italy, almost all large firms directly bargain over wages with unions, holding the nationwide industry contract as a benchmark. Negative wage growth is more common among movers and short-tenure workers. In addition, worker entry and exit rates are higher at low-pay firms and lower at high-pay firms.

This essay shows that there has only been one brief period since the 1970s in which real wages in the bottom half of the American income distribution have increased - the late 1990s. During this unusual period unemployment was low but this did not trigger a rise in inflation. In fact, a tight labour market led to improvements in job quality for low earners, as employers offered more fringe benefits to attract good workers. Given this evidence, the chapter argues that a high employment rate is an important policy goal when it comes to addressing stagnant wage growth, steeper rates of inequality and stubbornly high poverty levels.

The UK introduced the National Minimum Wage (NMW) in April 1999 with an adult rate of £3.60 per hour and as of October 2010 stands at £5.93. This chapter looks at a decade of the NMW in action. It examines how the initial rate was set and how upratings have compared with general wage growth. It asks how many employees have directly benefited from the NMW, and how the rate compares with rates in other countries. It provides an overview of the different approaches that have been used to estimate the employment effects of the NMW and reviews the evidence provided by this research. It determines whether the initial rate was set too low and where the rate should be set now.