GIIPS labour costs not moving in the "competitive" direction
by Rebecca Wilder
GIIPS labour costs not moving in the “competitive” direction
The GIIPS (Greece, Italy, Ireland, Portugal, and Spain) hope: exports. Fiscal austerity crimps the saving of the private sector. And provided the governments make good their plans to put on the fiscal straight-jacket, there’s no other impetus for growth except foreign demand. Financial crises are often accompanied by currency crises, i.e., Sweden 1991, which drives export growth if there is sufficient external demand. For Sweden, there was.
For the GIIPS, there is not. But worse yet, there’s not a possibility of a currency crisis deep enough to drive sufficient external demand growth in Greece, Italy, Ireland, Portugal, and Spain. Therefore, it’s generally understood that the GIIPS will get the economic boost if internal competitiveness is restored. Put another way, in lieu of a domestic impetus to economic growth, “internal devaluation” (Marshall Auerback calls it “infernal devaluation”), i.e, dropping hourly labor costs and final goods prices through productivity gains and reform, is the only economic means to attract a sufficient boost of external income to grow the economy.
Well, internal labour cost devaluation has yet to materialize in the GIIPS or the Eurozone as a whole. According to last week’s Eurostat release of Q1 2010 quarterly labour costs for the European Union, labour costs are still very much rising:
The two main components of labour costs are wages & salaries and non-wage costs. In the euro area, wages & salaries per hour worked grew by 2.0% in the year up to the first quarter of 2010, and the non-wage component by 2.1%, compared with 1.6% and 2.0% respectively for the fourth quarter of 2009. In the EU27, hourly wages & salaries rose by 2.3% and the non-wage component by 1.9% in the year up to the first quarter of 2010, compared with 1.9% and 2.5% respectively for the previous quarter.
There is a lag associated with labor cost growth, especially in Europe. But over the last two years, the Eurozone 16 saw labour costs rise a cumulative 5.3%, which is on par with the previous two-year horizon, 5.7%; labour cost growth isn’t even slowing.
(this chart was updated at 4:00pm on June 23)
The chart illustrates the two-year cumulative labour cost gains across the Eurozone 16 (seasonally and working-day adjusted) alongside the annual gains over the last year (working-day adjusted only). Note: country-level data for Ireland, Finland are not available. Furthermore, country-level data through Q1 2010 are not available for Belgium, Italy, and Greece, so Q4 2009 is used instead.
According to the measure of “labour costs”, it appears that “competitiveness” is not improving markedly in any country across the Eurozone, especially in the GIIPS that need it. In contrast, US nonfarm business unit labor costs dropped 4.2% over the last two years.
To be sure, there are other measures of “infernal devaluation”, like final goods prices. But strictly speaking labour costs remain too sticky in the Eurozone to attract external demand sufficient enough to offset the drag that would stem from the announced fiscal tightening across Europe.
Rebecca Wilder
How can there be demand for stuff in the world (which is what I think you or others are saying is needed for GIIPS salvation via export) when the whole world is working to decrease labor costs and the preferred method to do so is to move business to developing economies ie: China? Though, even China is seeing movement within the Asian region as it’s labor is being considered to costly.
Really, can we not see where this all leads to? Where is the worlds consumer market now that US has been through 30 plus years of declining income to the masses? China?
Reducing labor costs by reducing share of income to labor (which is what is needed for GIIPS to achieve as fast a reduction as suggested) only reduces overall market demand. It also serves to shift income and wealth up the line. Or do we ignor the American experience?
Dear Divorcedone,
YOu are absolutely right… Everything you say is true… I agree completely
And to follow up on your question… where is the consumer demand? China and other emerging economies are making up a large share of it now… Wages are rising in latin america and parts of asia…
One reason why wages are not falling in the eurozone is that people there have to maintain their households and won´t accept lower wages… They must be living month to month with what they have… so they are holding on tooth and nail to their wages…
This is also true in China but the wage earners there are in a position to fight for higher wages…
It seems eventually that europe will have tremendous downward pressures on wages especially since Germany and France want to keep their inflation rate low around 1 to 2%… This would put about a 5% downward pressure on wages in the GIIPS…
If only you would all spend half as much time rambling about the real issue – finance regulation. Germany is already in a real estate bubble now, Ireland is still overpriced. China is getting into outright crazy territory. We need better regulation now, not rambling about how bad the world might be if people stop buying shiny stuff. Look arround, everyone does buy lots of it.
Hi divorcedone,
I have written extensively about this, explicitly about Europe. It is a paradox to think that reducing labor costs will facilitate any sort of demand for the countries within a “Union” that derives 60-75% of their export income from other European countries (who are also cutting labor costs). It’s a fallacy of composition – and why Marshall Auerback calls it “infernal” devaulation.
I am NOT suggesting that dropping labor costs will lead to any kind of economic growth, rather the opposite (in other articles). Couple falling labor costs with fiscal austerity, and you’ve got a real problem. Only export income or expansionary fiscal policy can grow these economies. And only a massive currency devaluation or some sort of heroic external shock to exports will drive economic growth – unlikely in this globally tenuous economic environment.
Finally China’s not going to supply enough demand on its own, not even close. It’s got to come from the US and the UK…..
The Eurozone’s got a real problem! Rebecca
Ok, I didn’t think you were, suggesting such regarding devaluation, but it did not seem clear. Thank you.