Getting more people into work First of all, well-functioning labour markets are indispensable in fostering higher economic growth in the euro area. The still relatively high unemployment rates in the euro area clearly suggest that there is a need to spur not only labour supply but also labour demand. 6  See, for example, A. Alesina, S. Ardagna, G. Nicoletti and F. Schiantarelli (2005), “Regulation and investment”, Journal of the European Economic Association 3, pp. 791-825, in which the authors find that regulatory reforms have had a significant positive impact on capital accumulation in the transport, communication and utilities sectors, especially in the long run. In G. Nicoletti and S. Scarpetta (2003), “Regulation, productivity and growth”, Economic Policy, April, the authors find that various anti-competitive product market regulations significantly reduce total factor productivity growth at the industry level. J. Albert, G. Nicoletti and S. Scarpetta in their contribution to the conference provide a broad survey of the respective literature and some additional evidence. 7  Over the period 1995-2005, hourly labour productivity in the euro area grew on average by 1.6% and 2.5%, in the “wholesale and retail” and “financial” sectors respectively, compared with 3.6% and 3.4% in the United States. Source EUKLEMS database. BIS Review 18/2008  3  As regards labour demand, there is a need to reduce labour market rigidities that currently restrict wage differentiation and flexibility and thus tend to hinder the hiring of younger and older workers in particular.

Moreover, in those European countries and regions where competitiveness has been lost in the past and/or the unemployment rate remains too high, it is important that wage increases do not fully exhaust productivity gains in order to provide incentives for firms to create additional jobs. In this respect, sufficient wage differentiation is also required to improve the employment opportunities for less skilled-workers where there is high unemployment for this category of employees. The extent to which an increase in nominal wage growth leads to upward pressure on inflation depends crucially on trend labour productivity growth. Under normal circumstances, stronger labour productivity growth would justify an increase in nominal wage growth, thus allowing wage earners to participate in economic growth without adding to inflationary pressures. But, for the same reason, without sustained improvements in labour productivity, higher nominal wages would not lead to improvements in real purchasing power, but undermine job creation and fuel inflationary pressures. Against this background, the ECB’s Governing Council considers that, features enforcing wage rigidities and leading to nonoptimal wage setting – in particular indexation of nominal wages to the consumer price index – should be avoided. This is particularly accurate in this period where the euro area economy is currently in a juncture which is dominated by exogenous price shocks and uncertainty about the outlook of the real economy. Headline inflation which has been pushed up by external pressures on energy and food prices, is today significantly above 2% in the euro area and even higher in Spain.