An IMF Country report (01/2003) concluded that “wage moderation” played a more important role than reductions in employers’ social security contributions and replacement rates of unemployment compensation or the deregulation of labor markets in generating the increased employment intensity that characterized the expansion and the fall in unemployment in France, Italy and Spain in the second half of the 1990’s.
The analysis proceeds in two steps. First, the fact that the increases in employment that occurred were accompanied by reductions (rather than increases) in real effective wages was interpreted as a downward shift in the wage curves (with nominal wages adjusted for productivity as well as consumer prices). Accordingly, the major part of these wage curve shifts was accounted for by changes in the preferences of workers and their union representatives as they placed increased emphasis on “job preservation and creation”. Consequently (and this was the second part of the argument) the incentive for employers to substitute capital for labor was reduced: the elasticity of labor with respect to capital was increased in a “job-rich expansion”. The conclusion: “…wage moderation does work…With unemployment rates in all four countries (including Germany) at historically high levels, wage moderation needs to continue.”