Till Labor Cost Do Us Part A Vecm Model of Unit Labor Cost Convergence in the Euro Area

A sustainable path of relative competitiveness among the EMU countries is a key factor for the survivorship of the currency union in the long run. We analyze unit labor costs in the European Union with VECM methodology to evaluate relative competitiveness of euro area countries, controlling for exchange rate on the adjustment dynamics, for the economy as a whole and for the manufacturing sector, considered as a proxy of the tradable sector. Results show a lack of convergence of member countries, which is more pronounced for the tradable sector. Persisting idiosyncratic dynamics may be driven by different bargaining policies and institutional structures of national labor markets, and by differential path of technological advance deterring convergence of long run productivity.