SINTRA: Labour market reforms may have increased inequality in Germany, a paper presented at a showcase European Central Bank conference concluded on Tuesday, challenging a key tenet of monetary policy in the post-crisis years.

Central banks in Europe have long called for labour market reforms, including flexible wage setting, to help eliminate the sort of inequality created by high and persistent unemployment.

But the paper, authored by three University College London researchers, argued that increasingly decentralised wage setting and a drop in union membership over the past two decades hurt the poorest the most and kept wage growth depressed, becoming in itself a source of inequality.

Their conclusion is made more significant by efforts first in Spain and then in France — two of the eurozone’s top four economies — to reduce the centralisation of wage setting in part to cut stubbornly high jobless rates.

The paper, to be presented to an audience that includes ECB President Mario Draghi, Fed Chair Jerome Powell and Bank of Japan Governor Haruhiko Kuroda, may also in part explain why inflation has gone missing in Europe at a time of record employment.

“It is questionable that it is in a countrys interest to improve its competitiveness through low wage growth over a long time period, especially if it goes hand in hand with increasing wage inequality,” the paper said.

The eurozone’s jobless rates is still 8.5 per cent after a five-year growth run, even as Germany has cut its own rate below 4pc.

Jobless rates have also fallen in Spain and France through they remain relatively high, at almost 16pc and more than 9pc respectively, in both countries.

Germany has increased competitiveness by keeping wage growth muted, particularly in the case of the lowest paid workers. This fuelled an ‘employment miracle’ that pushed unemployment to record lows and increased competitiveness.

But this came through the creation of low-paying, low-skill jobs, resulting in a decline in average labour productivity, the paper argued.

This process was helped by rules allowing firms to opt out of collective wage deals, which became a self-reinforcing process: as firms opted out, unions then bargained for more modest terms to maintain their own relevance in the process.

In contrast, wage growth in France, where around 98pc of workers are covered by sector-level bargaining deals, wage growth has been relatively egalitarian, coming at the cost of still high unemployment, the paper argued.

Published in Dawn, June 20th, 2018