The effects of alternative wage regimes in a monetary union: A multi-country agent based-stock flow consistent model

The Eurozone crisis has revitalized the debate between economists on the role played by wages in open economies. Salaries paid to workers are at the same time a fundamental source of aggregate demand and a determinant of firms' international cost competitiveness. The paper investigates how alternative wage growth patterns impact on the economic dynamics of an artificial Monetary Union. For this sake, we perform several experiments employing the Agent Based-Stock Flow Consistent (AB-SFC) Multi-Country model first presented in Caiani et al. (2018a). Results show that a change in the wage growth pattern impacts in non-trivial ways on the demand and supply sides of the economies, giving rise to Keynesian and Schumpeterian effects. When occurring in a single country, wage expansions lead to a transitory deterioration of the country current account and to a slow-down of the economy in the short-run. However, on a longer time-span, higher wages tend to improve firms' innovative performance by strengthening the process of Schumpeterian competition, providing long run benefits in terms of higher labor productivity which allow the economy to recover. Conversely, a coordinated expansion of wages in all countries, which leaves their relative competitive position unaffected, tends to benefit real GDP, labor productivity growth, and countries' public finance, while not affecting unemployment and countries' external balance. A specular dynamics characterizes the experiments investigating the effects of wage moderation. Extensive sensitivity experiments show that these results are robust to different dimensions of the Monetary Union and that the efficacy of coordinated wage expansionary strategies is enhanced when consumers give more importance to price differentials in their consumption allocation decisions. (C) 2019 Elsevier B.V. All rights reserved.