Competitiveness and unemployment in the Eurozone

Objective:  The objective of this paper is to analyze the long term dynamics of the relationship between the competitiveness and the unemployment in the Eurozone, with emphasis on “North” and “South” differences. It is today commonly recognized that the restoration (and in fact the improvement) of competitiveness – especially among Eurozone members on the Mediterranean littoral – is the key for restoration of the economic health of those countries. Indeed, reduction of unemployment (from its current unprecedented heights) is necessary to restore political stability which in turn should lead to a restoration of hope and belief in the future prosperity of the common European project.

Background: The effort to restore and improve competitiveness implies improvement of the unit labor costs which in turn requires higher productivity (statistically, reduction of the wage bill as a share of GDP, measured macroeconomically).

On the macroeconomic scale, productivity can rise, elevating GDP and hence lowering unit labor costs (ULC) independently on the employment level. Alternatively, elimination of low productivity activities increases macro productivity (and reduces the ULC), but leads to a rise in unemployment.

Distinguishing between these alternatives is important for the Eurozone’s (and hence the EU’s) future. The first case is, indeed, desirable. In contrast, the second case raises the question of a possible tradeoff between competitiveness and full employment in the absence of a possibility of currency devaluation – the tradeoff which threatens the Eurozone’s cohesion and stability.  

Method and Data:  A variety of econometric techniques (Co-integration, VAR, SUR), for both the Northern (core) and the Southern (periphery) countries will be applied to determine the nature of the relationship between competitiveness (productivity) and unemployment in individual countries. Data for the study are obtained from both the Eurostat and the European Central Bank. 

Expected Results:  We expect to find significant divergencies between the North and South and individual countries within those groups. That conclusion then confirms the need for the Eurozone’s reform of both an investment union and labor markets. As recent developments demonstrated, unless addressed, divergent trends may constitute a significant, and perhaps the ultimate, threat to Eurozone cohesion and perhaps to its existence.