European Economic and Monetary Union's Perverse Effects on Sectoral Wage Inflation: Negative Feedback Effects from Institutional Change?

This is the author's peer-reviewed final manuscript, as accepted by the publisher. The published article is copyrighted by Sage Publications and can be found at: http://eup.sagepub.com/.Public sector unions push for unmerited wage increases, exacerbating inflation and deficits. Despite this conventional wisdom, governments in several European countries successfully limited public sector wage growth during the 1980s and 1990s. It is argued in this paper that the recent rise in public sector wage inflation in the Euro-zone is an unintended consequence of the shift towards Economic and Monetary Union. I argue that monetary union’s predecessors, the European Monetary System and Maastricht, imposed an institutional constraint on governments, which enhanced their ability to impose moderation: national-level, inflation-averse central banks that could punish rent-seeking sectoral wage-setters via monetary contraction. Monetary union’s altercation of this constraint weakened governments’ capability to deny inflationary settlements