Estimating The Appropriate “Wage-Setting Space” For External Balance And Job Creation Into The Greek Economy

Abstract

A flexible labor market framework is a main instrument for the economy’s adjustment in EMU, while wage formation process is of crucial importance for external balance and job creation. In this process, the estimation of the appropriate space for wage setting plays a key role for the economy’s performance. In this estimation exercise the inclusion of all factors that determine and affect the economy’s competitiveness in today’s economic environment is crucial. By this paper, we aim to empirically investigate the role of wage setting in the Greek economy’s competitiveness erosion before the crisis and the degree to which it has been restored during the current crisis period. On this basis we estimate the appropriate room for wage changes in the private and public sector that can sustain the country’s public and external balance, as a crucial precondition for the economy’s restarting in the new Euro fiscal pact framework.