Wages and Growth in Open Economies: A Policy Dilemma?

Abstract

One of the recent developments of the Great Recession (2008-present) has been the retrenchment of fiscal policies and an obsessive promotion of structural reforms, particularly in the labour market, as the only way out from crisis. Proposed reforms typically involve restructuring of the bargaining system and reduction in the minimum wages, employment protection and benefits. The objective is to make labour more flexible to increase efficiency as well as to reduce unit labour costs and improve external competitiveness. Such perspective on labour costs and growth has indeed gained prominence in this recent phase of crisis, recommended particularly to those economies undertaking severe fiscal consolidation measures. However, it has been a general prescription of the post-globalization era; a way to realize the benefits of liberalized trade and increased international competition. Moreover, it has been often promoted as a universal strategy for increasing growth.