The role of institutions in explaining wage determination in the Eurozone: A panel cointegration approach

Abstract

This article estimates the equilibrium wage equation for the Eurozone over the period 1995–2011 using panel cointegration techniques that allow for cross-section dependence and structural breaks. As expected, the results show that wages have a positive relationship with productivity and a negative relationship with unemployment. The authors also include institutional variables, showing that more flexible labour markets are consistent with wage moderation. They find that, since 2004, increased international competition has made wage determination more strictly related to productivity, and that real exchange rate appreciation triggers a drop in wages. Their results also indicate that government intervention and wage bargaining concertation have a wage-moderating role.