Higher real wages provide macroeconomic benefits in terms of increased demand if the economy is wage-led (as in most European economies) and of higher labour productivity growth and more rapid technological progress. Taking these benefits into account, we show that a wage-led economy becomes less strongly wage-led. The impact of higher real wage growth on employment growth becomes ambiguous. But for model parameter values which are realistic for the wage-led eurozone, higher real wages reduce employment growth. Contrariwise, real wage restraint in a weakly wage-led economy generates jobs – as recent European experience underscores. This internal contradiction in wage-led economies can be overcome if a high wage regime is complemented by supportive fiscal and monetary policies.
|Journal||Review of Keynesian Economics|
|Publication status||Published - 2017|