Wages, exchange rates and competitiveness

Conclusion Wage growth in west Germany has, over the longer term and with few exceptions, been far more closely oriented towards macroeconomic productivity growth than in the majority of its competitor countries. Even after adjusting for exchange rate movements, it is evident that unit labour costs in west Germany have, in general, growth significantly less strongly and in most cases are lower in absolute terms than abroad. The fact that, in spite of this, Germany has repeatedly faced foreign trade problems, is due to the volatility of exchanges rates. The demand—in such cases seemingly self-evident, although usually not explicitly formulated—that collective wage bargainers ought to orient wage growth not only towards productivity growth but also towards exchange rates would mean standing the economy on its head, however. A rational alternative to this is to stabilise exchange rates or indeed their partial abolition, as is the aim of European Monetary Union. It would be irrational, on the other hand, to abolish the wage determination system which, on the whole, has proved its effectiveness in orienting average wage increases towards macroeconomic productivity growth.