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Euro Is a Common Liability

“Euro Is a Common Liability” is a 3-part series response to Aleksander Thomas’ EST article ” The Euro Is Our Common Fate“. For part I, refer here.

As another expec­ted Euro crisis unravels in Cyprus, a con­sec­ut­ive round of crit­ical exam­in­a­tions of the com­mon cur­rency is required. Instead of repeat­ing the same man­tras of lost inde­pend­ent mon­et­ary policies or severe dif­fer­ences in the European eco­nom­ies’ busi­ness cycles, another approach is needed. Per­haps the incon­veni­ent truth and the neg­at­ive unin­ten­ded con­sequences of the com­mon mar­ket are the fact that with one cur­rency, fluc­tu­ations in the European Union min­imum wage are inher­ently cre­at­ing det­ri­mental imbalances.

Prag­mat­ism, please.

First, let us exam­ine the fun­da­ment­als of min­imum wage and the con­sequences of such to eco­nomic growth. The cur­rent dis­cus­sions on min­imum wage have been futile given the fact that a great major­ity of the argu­ments for increas­ing wages are based on emo­tion­ally attached sen­ti­ments. Admit­tedly, the school of Keyne­sian eco­nom­ics sug­gests how higher wages would pro­duce more con­sump­tion, hence stim­u­late growth through higher aggreg­ate demand. How­ever, such reas­on­ing is a fal­lacy simply because in this par­tic­u­lar topic, we must exer­cise counter-intuitive think­ing. One doesn’t have to be neces­sar­ily a firm adher­ent of the Austrian School of Economics or under­stand the premise of Say’s Law, but rather exam­ine the tacit unin­ten­ded con­sequence of increas­ing wages without con­sid­er­ing over­all labor pro­ductiv­ity and added value.

How Much Are You Worth?

To put it simply, wage rep­res­ents the value of one’s input, or the value of your skills. If the gov­ern­ment sets the level of min­imum wage at a cer­tain level (let us use 5EUR/hour as an example) such decision dir­ectly implies that the least valu­able skill in a given eco­nomy is worth of 5 Euros/hour. Such pos­i­tion seems a bit ran­dom given the fact that if some por­tion of labor cur­rently do not pos­sess skills val­ued at 5 Euros but 3.50 Euros, should they be employed with the cur­rent min­imum wage? The fol­low­ers of social equal­ity and people with assumed know­ledge of other indi­vidu­als’ mar­ginal bene­fits would insist on hir­ing such indi­vidu­als simply on the basis of inac­cur­ate motives. If the con­tri­bu­tion of the worker does not cre­ate profit for the busi­ness, there is no reas­on­able jus­ti­fic­a­tion to pay for such worker the cur­rent man­dat­ory hourly wage. As a res­ult, the employer can­not hire a per­son, whose skills are not aligned with with the required wage-level. The mar­ginal costs of labor do not match the mar­ginal bene­fits, hence the employer is better-off not hir­ing, unless he/she will increase the final price of the product/service. Such out­come is not effi­cient given that the con­sumers would bear the adjust­ment through higher prices, decreas­ing tem­por­ar­ily their pur­chas­ing power.

Dif­fer­ences in Europe

In 2013, 20 EU mem­bers had imple­men­ted a min­imum wage legis­la­tion. With a com­mon cur­rency and a single-market the dif­fer­ence in national (monthly) min­imum wages is expec­ted to be quite small. Unfor­tu­nately the dif­fer­ence between the low­est (Romania, 123EUR) and the highest (Lux­em­bourg, 1847EUR) sug­gests that the com­mon cur­rency has not delivered neces­sary bal­ance in the EMU-area wages. It is all the more trouble­some when one sees the wage dif­fer­ence rel­at­ive to each Mem­ber State’s over­all price level. One might ask whether such phe­nomenon makes much dif­fer­ence for the EMU’s eco­nomic growth. At first it might seem that such dif­fer­ences would not have spill-over effects on the over­all eco­nomic per­form­ance of the Euro-zone, but once again we must peek through the veil of claims and data. With open bor­ders for cap­ital and people, the labor move­ment in the Euro-zone is some­thing that the optimal cur­rency area praised. How­ever, with such vast dif­fer­ences in wage levels within the Euro-zone, the con­cen­tra­tion of labor move­ment is dir­ec­ted to the higher-wage areas. For example, Esto­nian work­ers migrate to Fin­land or Ire­land in search for higher wages, or Romani­ans and Bul­gari­ans seek higher stand­ard of liv­ing in Ger­many. Con­sequently, some people might ask naively: What could go wrong?

A Lot Can Go Wrong

Such move­ment towards higher wages does not neces­sar­ily res­ult in higher pro­ductiv­ity. With higher wages and more com­pet­i­tion in labor mar­kets, those who do not pos­sess the skills worth of 5EUR/hour can­not find work. Fur­ther­more, when Esto­ni­ans migrate to Ire­land for work, an actual short­age of skilled work­ers in Esto­nia causes unne­ces­sary unem­ploy­ment: since the wage levels in Esto­nia are not com­pel­ling for a Span­iard or young­sters from France, nobody has the incent­ive to replace the lost work­force in Esto­nia. To make the situ­ation more det­ri­mental, higher labor move­ment would mean that domestic eco­nom­ies are going to have severe future prob­lems in their pen­sion funds since less people are con­trib­ut­ing to the domestic social secur­ity system.

No Escape

What can be done? With a com­mon cur­rency, such dif­fer­ences in domestic wage levels are caus­ing more irre­vers­ible dam­ages. Such dilemma (adjusting the common currency or setting European wide minimum wage) is a com­bin­a­tion of an incom­plete mon­et­ary union, aggress­ive labor move­ment and broad dif­fer­ences in min­imum wages between Mem­ber States. Since such policies are dif­fi­cult to reform (thus reflect­ing the real­it­ies of 27 Mem­ber States), the Euro has become a mutual liab­il­ity, rather than a fate or com­mon asset.

– Henry Erti

Dis­claimer: This art­icle was ori­gin­ally pub­lished as Euro Is a Common Liability (Part II of III)  on April 6, 2013 in The European Student Think Tank, a PB cooper­a­tion partner

 

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