So I read in the New York Times that Greek private sector salaries fell a punishing 22.5% in 2011 in real terms. That stunned me. So I went to Eurostat. Their figures for nominal labor costs were slightly less impressive, but still shocking. (2008 = 100.)
Internal devaluation at work! Sure, Greece is still working off earlier excessive wage gains, but that should presage an export boom, right? Cheaper workers, cheaper vacations for foreigners, more tourism, more exports.
Except ... well, according to OECD data, output is declining along with wages. (See below; 2005 = 100.) Unit labor costs are down, but not when seasonally adjusted, and really not relative to Germany or the rest of the Eurozone. Maybe that’s not relevant. After all, as long as output per worker in potential export sectors isn’t falling, then economy-wide unit labor costs should not matter ... but only for those industries. They will matter a lot in other industries, which are seeing demand (foreign and domestic, as proxied by the value of output) drop as fast as their wage bill.
Add to that (1) rising debt burdens for Greek workers, since debts aren’t indexed to wages; (2) rising taxes on Greek workers; (3) people’s desire to save in euros (outside Greece or in cash) in the face of a possible Grexit; and (4) the awful awful feeling that comes with people as they watch their nominal incomes plummet.
Put it together, and it isn’t clear to me that the rather surprising unstickiness of Greek wages is going to produce much of a quick recovery even if wages fall substantially more. (There have been a lot of reforms to Greek labor law in the last few years.) Of course, the Argentine experience implies that a Grexit won’t be better ... Argentine GDP plunged 15% in the year after the devaluation, and recovery took place in the context of strong external demand.
I am not optimistic.
Postscript: see “Is Increased Price Flexibility Destabilizing?” by Brad Delong and Larry Summers. (Also found here.) See also “The Barber of Buenos Aires.”
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