Wage moderation in Europe

Guardian journalist, Aditya Chakrabortty, recently picked up on a paper by Keynesian economist, Engelbert Stockhammer. Chakrabortty’s aim was to show how behind the curve the British Labour Party is: one of its leader’s intellectual gurus, Maurice Glasman, had been recently vaunting the merits of Germany’s social market economy, suggesting the Labour Party should look to the German experience in formulating its own growth agenda. Chakrabortty cited Stockhammer’s paper, and particularly its mention of the role played by low wages in Germany in the wider Eurozone crisis, as evidence that Germany is “the number 1 problem economy in Europe” and that Ed Milliband should look elsewhere for inspiration.

The phenomenon of wage moderation in Germany is a point that has been made before on The Current Moment. It lies behind Germany’s export-led growth model and is the result both of the government’s ability to secure wage deals with key unions and the downward pressure on wages generated by low wage competition from Central and Eastern Europe. It is misleading, however, to present this as a particularly German phenomenon. By presenting his analysis in terms of strict accounting identities, Stockhammer is able to argue in his paper that higher wages in Germany would automatically provide an alternative way out of the crisis to that of austerity and wage cuts in the Eurozone periphery.

This focus on Germany is only part of the story. Wage moderation is a European-wide phenomenon, as are flexible labour markets. Wage moderation has been institutionalized in the Netherlands as a core part of its famous “Polder model”. The Dutch approach as been to secure wage moderation both through negotiations and via the pressure of an increasingly flexible labour market. 18.5% of the total number of employees in the Netherlands are on fixed-term contracts. The figure for Germany is 14.7%. The Eurozone average is 15.6% and the figure for the UK is only 6.1% (figures from FT here – graphs are below).

Beyond the Netherlands and Germany, neo-corporatist negotiations between labour and governments in the form of social pacts have generally served to keep wages down. Stockhammer notes in his paper that no less than 29 social pacts have been made in Europe since the early 1980s, all aiming to contain the growth of wages in the interest of boosting national competitiveness.

Wage moderation has been institutionalized as a feature of European economies since the early 1980s. The pattern of European integration since then reflects this development. The terms of European monetary union, for instance, contains rules on monetary and fiscal policies, meaning that the bulk of adjustment is placed on labour markets. What we are seeing in the current crisis, particularly in the terms of the bail-out packages, is an attempt to force labour markets in peripheral Eurozone countries to shoulder the burden of adjustment, as required by the terms of EMU. Responding to these attempts requires an analysis that goes beyond Germany and looks at the trajectory taken by European societies over the last 20 years.