Unit labour costs and the dynamics of output and unemployment in the southern European crisis countries

The GIPS countries, the southern European crisis countries, have seen depressed output dynamics and high unemployment rates during the great recession following the 2007-08 financial crisis. This paper considers the effects of measures that seek to improve competitiveness by reducing real unit labour costs. The results are derived in structural vector autoregressive models for each of the GIPS countries 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.