|Source: FT Alphaville; HT: Tyler Cowen|
Observe the changes in nominal wages in the pre-crisis decade (grey columns). It reminds me of a graph I've had before in the text on Sweden, where unit labour costs were compared across the Eurozone periphery to Sweden and USA, with respect to German labour costs. The effect on competitiveness was more than clear from that graph. This one shows a similar convergence picture, where Greek, Irish and Spanish nominal wages were adjusting to equate the Eurozone 'average' (there was another similar graph which measured real disposable income for various EU economies).
Germany, on the other hand, in the same period experienced a significant nominal wage decrease partially as an effect of the unification in the 1990s, but mostly because of their labour market reforms which have ensured a long period of wage moderation. As I've shown in a previous text, this wage moderation was the key in preventing a downturn in the labour market during the current crisis.
The blue columns represent the current re-adjustment of nominal wages in the periphery, or in layman terms, a reversal of the wage growth from the past 10 years. Was it done too fast? Is it necessary? Was it unsustainable and unrealistic to expect a convergence based on the pre-crisis growth models in the periphery? Maybe, yes, yes.