How bad is divergence in the euro zone? Lessons from the United States and Germany

Abstract

This paper compares relative unit labor cost developments in the countries of the euro area since the beginning of the European Monetary Union (EMU) both with historical developments and with intraregional developments in the United States and Germany. Unit labor cost indices for the U.S. states and census regions from 1977 to 1997 as well as for the German Länder from 1970 to 2004 have been constructed. It is found that unit labor cost increases since 1999 in Portugal, and to a lesser extent, in Spain and Greece can be judged as excessive, which might impair a smooth working of the EMU in the future.

Keywords:

• divergences
• European Monetary Union
• labor costs