- Home
- Publications
- Wage Moderation Policy In Germany
Wage Moderation Policy in Germany
In this paper we briefly discuss the current condition of the German economy and the proposals from the government in March 2003 to reform labour markets. These reforms involve various measures to reduce the generosity of benefits and to increase the incentives to work. In order to analyse these reforms we simulate a temporary reduction in German real wage growth and discuss how German output, inflation, and interest rate are affected, under two distinct ECB monetary policy rules. We discuss the possible forward looking reactions of the ECB to these reforms and argue that it would be wise to respond in a fully accommodating way. The sensitivity of the ECB to changes in European key macroeconomic indicators is tested by analysing a scenario involving a reduction in French, Italian and German wages. It appears that single country wage moderation policies increase the country's competitiveness relative to other European countries, and hence helps raise the output effects in that country. We also consider that interest rates are set according to pre- 1999 rules, with monetary policy more responsive to German conditions. German output would respond more quickly to the labour market reforms, but the long run consequences are the same, so there are no sustained benefits from an independent monetary policy.
Related Blog Posts
Breaking Down the Different Types of Pension in the UK
Robyn Smith
Adrian Pabst
25 Mar 2024
6 min read
What Are the Implications of the Rising National Minimum Wage and National Living Wage Rates?
Ekaterina Aleynikova
Adrian Pabst
19 Mar 2024
5 min read
How Changes in Migration Policy Could Boost Scotland’s Economy
Max Mosley
Ekaterina Aleynikova
18 Dec 2023
3 min read
Related Projects
Related News
Press Release: Compositional effects push up average weekly earnings at the end of 2020
26 Jan 2021
2 min read
Press Release: 2020 shaping up to be the worst year for total pay growth since 2009
15 Dec 2020
2 min read
Related Publications
The Nature of the Inflationary Surprise in Europe and the USA
21 Mar 2024
Discussion Papers
Pay-Setting Among Employers in the Agriculture, Cleaning, Hospitality and Retail Sectors
11 Mar 2024
Research Report
Energy and Climate Policy in a DSGE Model of the United Kingdom
08 Mar 2024
Discussion Papers