_<u>Lower real wages.</u>_ In terms of wages, Greece stands out in relation to the others, having a 21% decline in the minimum wage (9a) and a 20% decline in the average wage during 2009‐2014. Greece’s real wage levels are now at their 2000 levels. Portugal and Spain increased protection for the lower income earners and had increases in their minimum wages (while the average real wage fell around 7%). Ireland was different in that both were relatively stable (the real wage declined only 1.5%). Lower labor costs were not reflected in higher employment, but rather in compressed consumption, particularly as households deleveraged and expectations of global growth recovery were muted.

**Table 11a: Monthly minimum wages, Euro**

||2000|2001|2002|2003|2004|2005|2006|2007|2008|2009|2010|2011|2012|2013|2014|2015|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Greece|540|552|582|607|631|668|710|768|794|863|863|877|684|684|684|684|
|Ireland|945|1009|1009|1073|1183|1293|1293|1462|1462|1462|1462|1462|1462|1462|1462|1462|
|Portugal|371|390|406|416|426|437|450|470|497|525|554|566|566|566|566|589|
|Spain|496|506|516|526|573|599|631|666|700|728|739|748|748|753|753|757|
|EU‐28<sup>*</sup>|476|511|526|541|569|593|611|655|667|681|698|709|719|733|751|807|

*: Simple averages of EU member states excluding Austria, Cyprus, Finland, Denmark, Italy, and Sweden. Source: Eurostat.

**Table 11.b: Non‐wage labor cost as a share of total labor cost (%)**

||2001|2002|2003|2004|2005|2006|2007|2008|2009|2010|2011|2012|2013|2014|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Greece|38.2|39.3|39.9|41.4|41.2|42.3|42.1|41.5|41.3|40.1|43.2|42.9|41.6|40.4|
|Ireland|25.9|24.4|24.4|24.1|23.5|23.0|22.2|22.3|24.7|25.8|25.8|25.9|27.1|28.2|
|Portugal|36.4|37.6|37.4|37.4|36.8|37.5|37.3|36.9|36.5|37.1|38.0|37.6|41.4|41.2|
|Spain|38.9|39.1|38.6|38.8|39.0|39.1|39.0|38.0|38.3|39.7|40.0|40.6|40.7|40.7|
|EU‐28<sup>*</sup>|42.9|42.7|42.7|42.8|40.7|40.6|40.4|40.9|40.5|40.4|40.9|41.1|41.0|41.0|

*: Simple average. Source: Joint European Commission‐OECD project, Tax & benefits indicators database.

Recent ECB research notes that wages and prices have begun to be more flexible in these countries, responding to underlying conditions.<sup>78</sup> However, when comparing levels and ranking across countries, Figures 15a‐c show that GPS still have very restrictive labor markets‐ their ranking remains very poor, while the tax wedge remains high.

# **Lesson 11: The short term affects the long term.**

_<u>Hysteresis effects are real and can be large; “stabilization” policies have short and long‐run effects. Labor and product market reforms are effective when they reduce the length of time that resources remain unemployed or underused.</u>_ _<u>Large losses in employment, lower labor intensity of GDP.</u>_ Employment between 2008‐2014 has fallen 18% for Greece, followed closely by Spain at 16%. Portugal and Ireland have had 11 and 10 percent declines in these six years. As Table 12 shows, the relationship between growth and employment seems to have changed in at least three of the countries. It is significantly weaker in Ireland, where growth has been the strongest and significantly stronger in Portugal, where recession has been mirrored in much larger employment losses than might have been expected given the growth‐employment relationship of the pre‐crisis years. The lower demand for labor has been the result of a slow growth recovery, expectations of more of the same. Even Ireland, with a relatively flexible labor market, has seen poor labor market performance. The consumption dampening effect of internal devaluation was underestimated. Barkbu et al (2012) note that internal devaluations usually end up in drawn out recessions.

> 78 ECB, 2015b.

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