Unit Labour Costs and the Dynamics of Output and Unemployment in the South ern European Crisis Countries

Abstract

The GIPS countries, the south ern European crisis countries, have seen depressed output dynamics and high unemployment rates during the great recession following the 2007 - 2008 financial crisis . Th is paper considers the effects of measures that seek to improve competitiveness by reducing real unit labour costs. The results are deriv ed in structural vector autoregressive models for each of t he GIPS counties as well as two reference countries , Germany and the Netherlands. The responses of output and unemployment to innovations in real unit labour costs are economically and statistically significant for Germany and the Netherlands, whereas the responses are typically muted and imprecise estimated for the GIPS countries. The small and uncertain effects raise doubts regarding the efficacy of measures that seek to lower real unit labour costs in the GIPS countries