An Empirical Investigation of the Relationship between Unit Labor Cost and Price Developments : The Case of Greece

In recent years, the rate of change of prices in the Greek economy does not seem to react proportionately to large reductions in wage costs cuts in the effort for fiscal consolidation and improving competitiveness. The disconnection between of price and wage developments makes harder the functioning of the monetary policy transmission channel. The proper function of the latter is important as hastens the target adjustments in terms of competitiveness and consumer purchasing power, thus supporting the growth and stability of the economy.This study examines the relationship between unit labor costs and price developments for the whole economy and for the main sectors. For the period 2000-2013 the econometric investigation provides evidence that prices and unit labor costs are characterized by a long-run equilibrium relationship and that for the whole economy, prices influence the development of unit labor costs, and vice versa.But for the period 2010-2013, the empirical findings show that the overall economy and particularly in the industrial sector, changes in unit labor costs have been largely disconnected from those prices, resulting in a profit margin to grow. The large reduction in unit labor costs is primarily due to the reduction in nominal compensation per employee and not an increase in labor productivity.Concluded that raising productivity is the critical factor that will improve the competitiveness of the economy, since the benefits of a possible further reduction of wages is ambiguous, and, moreover, such a policy would lead to a loss of social cohesion