Our study analyzes labor cost development before and after the introduction of the Euro in EU member states. We are motivated by the current debate on diverging labor costs and the role of national governments, and on possible institutional reforms like the installation of a supra-regional  transfer  scheme  for  compensation  the asymmetric distribution of  shocks and costs. Our approach  is different o  long-run convergence approaches. We ask whether  the reactions
of  national wage  formation  processes  against  shocks  converge  or  diverge  in  the  European Monetary Union (EMU). The empirical method is closely related to the theory of endogenous currency  areas,  which  assumes  that  a  single  currency  and  common monetary  policy  force agents  to  react  in a  similar way. Testing a  structured model, we  find  that  the  impact of  the currency  union  on  wage  formation  through  trade  intensity,  industry-specific  shocks  and financial  integration  is  of  minor  relevance.  Also,  we  find  national  tax  policy  to  be  a potentially decisive instrument that might contribute to a fragmentation of wage formation in the euro area.