In the September-5th post about the German Miracle (wage moderation + productivity improvement), in this blog here, I showed the comparative picture on competitiveness trends for six advanced economies – Usa, United Kingdom, Spain, Italy, Germany and France. For this purpose hourly labor compensation is measured in nominal terms (in national currencies and thus in current Us dollars, Uk pounds, and Euros ), as it should be when competitiveness is involved and labor costs are compared across countries. Now I present the same evidence of the first graph but considering real labor compensation (and thus real unit labor cost) in manufacturing. Real wages differ from nominal wages for inflation that places a wedge between the two measures. Adjusting for domestic inflation (on CPI basis), the picture changes in some way. Now, Italy shows a degree of “wage moderation” (in real terms) very close to that of Germany. Real wages trend in Italy (4.8%) is comparable with the trend in Germany (4.4%). This depends on the higher inflation in Italy. Even in Spain and in United Kingdom, and for the same reason, real wages growth appears “moderate” and not so far from the performance of Germany (6.3% and 6.9% respectively). On the contrary, France (9.3%) and above all Usa (18.2%) show a higher growth in real wages than other countries. Of course hourly productivity is the same of the previous graph and thus also in real terms competitiveness in Italy shows the worst performance. In other terms, the inflation adjustment is not sufficient to compensate the very poor performance in productivity. This confirms once more that the real problem for Italy is slow productivity growth. It is important to understand that when real wages grow slower than labor productivity, not only unit labor cost growth is negative but there is a decline in the manufacturing labor share and an increase in the capital share. This makes clear the link between profits and prices, and the fact that the latters are related not only to labor cost. All this said, it would be interesting to look at this picture adding years subsequent to 2012 (which is the terminal year for data provided by Conference Board International Labor Comparison). This is because in 2013 and 2014, inflation sharply decelerated in Italy and in Eurozone. It is simply to argue that if in the meantime productivity growth rate in manufacturing did not change (remaining low), as it seems to be the case, and the same for nominal compensation evolution, the outlook of competitiveness in Italy shall be even gloomier. As we shall see in short, real wages decreased in Italy (and in Eurozone) between 2010 and 2013. To sum up, reasoning and evidence provided here and in previous posts demonstrate that the role of wage moderation is greatly exaggerated. Yes, wage growth must be consistent with productivity growth, otherwise a drag is permanently put on competitiveness, but wage restraint is not a recipe for growth, or at least the unique one and regardless of any circumstance. What matters is productivity. Moreover, competitiveness depends ultimately on prices and prices depend indisputably on labor costs but even on market power and pricing strategies of firms. Thus, a disproportionate rise in profits and rents may be an impediment to competitiveness in the same way of an excessive wage growth. True, in circumstances like those of Italy, a mix of wage moderation and productivity improvement might be needed to restore competitiveness in due time. But squeezing disproportionately wages is not without consequences because increases the risk of deflation. Between 2010 and 2013 real wage were flat across the advanced economies according to the last Oecd Employment Outlook (September 3rd). Real wages have barely risen in Usa over that period and have fallen in Japan, in Great Britain and in the average of Eurozone countries – compensation adjusted for inflation decreased in Portugal, Spain, and Italy, but not in France and, take note, in Germany, the celebrated hero of “wage moderation” plot. In the graph, based in Oecd figures relative now to the total economy and no more to manufacturing, the evidence is showed for real wage and unit labor cost in the same countries of previous charts plus Oecd aggregate. For the period 2007-13, real wage growth was negative only in Italy (-0.3%) and in Great Britain (-1%), but in all other countries, excluding Germany, there was a significant flattening in real wage dynamics relative to previous period 2000-7 (not showed in the graph). Despite this, real unit labor cost dynamics is faster in Italy than in other Oecd countries (note that among the Eurozone countries, France and especially Germany peform worst than Italy in “real” competitiveness dynamics). Again, this evolution confirms that labor productivity is picking up in these countries but not in Italy. At the same time, it seems indisputable that the so-called German miracle has lost momentum. But the moral for Italy remains the same and is unambiguous: labor market reform is the priority.