The synchronization of wage dynamics across EMU members. A test of the endogeneity hypothesis

We test the hypothesis of an endogenous currency area for the labour market of the Euro area: has the introduction of a common currency caused wage dynamics to become more synchronised and to be able to cushion for asymmetric shocks? Trade intensity, sector specialisation and financial integration are tested for being the driving forces for the endogenous synchronisation of wage dynamics. We use regression techniques with instrument variables, and find evidence of persistent asymmetries in nominal wage formation, despite a single currency and monetary policy. We explain the result with more specialisation following financial integration, and with still existing differences in wage formation and labour market institutions. We conclude that the euro zone is not endogenous with respect to wage formation. Rather, there are incentives for beggar-thy-neighbour policies in the Euro area.