Wage Restraint and European Monetary Union: The Impact of Currency Regimes on Sectoral Wage Divergence

Johnston, Alison (2009) Wage Restraint and European Monetary Union: The Impact of Currency Regimes on Sectoral Wage Divergence. In: UNSPECIFIED.

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Abstract

In this paper, the rising divergence in sectoral wage moderation within European Monetary Union (EMU) member states since the introduction of the Euro is examined. During the 1980s and 1990s, wage restraint cycles between exposed, manufacturing sectors, and sheltered, private services sectors within EMU candidate-countries were highly synchronous, and differences in wage inflation between sectors within countries was low. After 1996, significant divergence in sectoral wage inflation emerged, and synchronicity of wage restraint cycles between sectors collapsed after 1999. This paper will address the question of why divergence occurred between sectoral wage restraint within EMU countries after 1996. It will be argued that monetary union’s removal of national exchange rate pegs and inflation criteria, and the central banks that enforced them, accentuated wage preference divergence between actors in the exposed and sheltered sectors, enabling unions in sheltered sectors to push for high wage increases while unions in more exposed sectors had to continue with wage moderation due to competitiveness constraints. Unlike some political science literature that assumes powerful, protected sectors produce excessive wage inflation at the expense of the exposed sector, it will be argued that the European Monetary System’s fixed exchange rate arrangements, and more importantly the Maastricht inflation criteria, provided an effective monetary constraint on sheltered sector wage growth, keeping sheltered sector wage moderation in line with wage restraint developments in the exposed sector in the 1980s and early 1990s.

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