For further information:
Robert McGuckin, (212) 339-0303
The Conference Board,
Bart van Ark, (31-50) 527-2438
The Conference Board Europe
For Immediate Release Release #4470A
EUROPE HEADING FOR SLOWER WAGE GROWTH AND INCREASED SERVICE JOBS
Conference Board Sees Richer Europe Emerging From the Euro
March 1, 1999 -- The European Monetary Union (EMU) will increase price discipline among Union members, leading to wage moderation and a reduction of wage differentials among countries, according to a new report released today by The Conference Board.
"Slower growth in wages combined with increased fiscal policy competition among member states will support new business opportunities and help to improve European labor market participation rates and bring them closer to those in the U.S." according to Robert H. McGuckin, co-author of the report and director of economic research at The Conference Board.
The study, Perspectives on a Global Economy: The Euro's Impact on European Labor Markets, also found that recent slackening in some countries' restrictions on product markets (such as limits on business hours, locations, and operating rules) will likely spread across the region.
The report is part of a continuing series from The Conference Board focusing on productivity growth and living standards. The report examines how and why productivity and living standards differ around the world and the consequences of these differences.
PRODUCTIVITY GROWTH WILL SLOW, BUT SERVICE JOBS WILL INCREASE
The report finds that much of the new employment created by the European Monetary Union will be in the service sector, where Europe has lagged the U.S. But this expansion of the service sector will slow productivity growth in Europe as previously unemployed low skilled workers find work in relatively low productivity jobs.
"Despite slower productivity growth, increased participation rates will improve per capita income levels across Europe, which could create a wealthier European market for all types of goods and services," says Bart van Ark, co-author of the report and consulting director for the Conference Board's international economic research.
THE EURO WILL PUT GREATER PRESSURE ON LABOR MARKETS
Since the official launch of the Euro in January 1999, exchange rates between countries in the EMU, which currently includes most EU member states except Denmark, Sweden, the U.K., and Greece, have become fixed and control over monetary policy has shifted from the individual countries to the European Central Bank. Individual countries will have fewer policy tools to work with when they experience economic or political shocks affecting their markets.
The reduction in policy tools will place great pressure for adjustments on European labor markets to buffer the effects of these shocks. And the report predicts that the EMU member countries will continue to be buffeted by diverse economic disturbances.
EUROPEAN ECONOMY WILL LOOK MORE AND MORE LIKE THE U.S.
Because the introduction of the Euro means lower exchange rate risk and greater transparency of prices across the European Union, it will contribute to lower transaction costs across Europe.
"Lower transactions costs should make the European economy more like that in the U.S., and support trade as well as lower capital costs, as European capital markets become more integrated," says McGuckin. "Integrated capital markets, in turn, should reduce borrowing costs and support business expansion."
The report finds that Europe will also be more like the U.S. from a policy perspective. EMU states will be restricted to non-monetary policy actions, like the states in the U.S. Monetary policy will be coordinated by the European Central Bank, whose primary goal is price stability. While U.S. monetary policy has both employment and price objectives, inflation concerns have dominated U.S. policy for the past 20 years. Therefore, in practical terms there will be little difference between the monetary objectives of the U.S. and Europe.
Facing this common monetary policy, European national governments may begin placing more emphasis on fiscal policy (e.g. tax subsidies and public infrastructure investments). This will probably raise many of the same issues as in the U.S., where some have argued that states are engaged in a "race to the bottom" by offering subsidies, eased regulations, wage moderation, and other inducements to attract and hold businesses. In Europe, this process should help abolish many of the rules and regulations currently restricting the expansion of product markets, and help moderate labor costs across Europe.
KEY DIFFERENCES WILL REMAIN
Unlike the U.S., where fiscal policy is enacted at both state and national levels, European fiscal policies will remain largely within the jurisdiction of member countries. But important constraints on member state policies will exist. For example, according to present arrangements, budget deficits must be kept within 3% of Gross Domestic Product (GDP), and a 60% target for the ratio of total debt to GDP is in operation.
In contrast to the U.S., constraints on labor mobility across European member states appear much greater. In 1994, for example, almost 3% of those aged 16-64 moved between the states in the U.S., only about 0.2% of EU nationals moved between member states. This difference is key, since recent studies suggest that an important aspect of labor market adjustments in the U.S. is the migrations of workers from one area to another. In Europe, these adjustments are more likely to come from changes in labor force participation.
While there are no formal restrictions on individual movement across borders within Europe, many factors can inhibit mobility. Differences in language, pension systems, health care, education, and the organization of social security, disability, and unemployment policies are much greater in Europe than across the U.S.
Although the effects of the European monetary union will improve employment in Europe, it is unlikely that European labor participation rates will reach U.S. levels.
Source: Perspectives on a Global Economy: The Euro's Impact on European Labor Markets Report #1236-99-RR, The Conference Board
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