Wage Moderation Does Not Work: Unemployment in Europe

Abstract

Orthodox economics blames rigid labor markets and, consequently, high wages for high and persistent unemployment in the euro-area. This is at odds with stylized facts. Unemployment has remained high despite the fact that wage shares have fallen substantially since 1980. Wages moderation has proven unable to improve the employment performance of the euro-area for the past twenty-five years. One reason for this is that the demand regime in the euro-area is wage led.