Policy Article

Price Competitiveness Divergence in the Euro Area: The Level Matters!

Kiel Policy Briefs, 24

This article argues that the fixation on indices or growth rates in the current discussion around price competitiveness in the euro area and the policy proposals that emerged from entirely ignoring levels may be misleading. In particular, we first present the peculiar conclusions that have emerged from exclusively considering unit labor cost indices. We will then have a close look at available data on unit labor cost levels. Finally, we illustrate the odd consequences of the rule explicitly or implicitly proposed by many economists that nominal unit labor cost should grow at the same rate across all member states of the euro area.


Björn van Roye