Slower growth and more modest real wage increases are likely, which will reverse households optimistic expectations.

A decade of wage growth exceeding productivity gains led to real appreciation, loss of competitiveness, and large current account deficits.

Unemployment remained high, at 7.8 at the end of 2012, and there has been almost no real wage growth over the last few years.

Average unemployment would then have to rise in order to keep workers demands for real wage increases at a level warranted by productivity growth.

Wage growth, rather than borrowing and financial booms, fuelled demand growth.

Most of these economies were suffering a loss of their export markets to low wage Asia. A decade of wage growth exceeding productivity gains led to real appreciation, loss of competitiveness, and large current account deficits.

More focus on innovation and creativity will be accompanied by strong real wage growth, provision of greater rights for urban migrants, and expansion of health care and pensions.

Then a decade of nominal wage growth that out paced productivity gains led to a rise in unit labor costs, real exchange rate appreciation, and large current account deficits.

This disparity reflected some differences in productivity growth but even more so differences in wage growth.

Muted wage growth increases competitiveness, and underutilized labor and capital are redeployed.

Moreover, wage flexibility meant that substantially slower wage growth in the states that lost industries helped to attract and retain other industries.

The average real wage has been flat in the US for 20 years, with 1 of the population capturing all of the gains brought about by a 50 growth in GDP during this period.

So the real question is, What drives wages? Country level data suggest that the largest wage increases over the last decade are generally associated with the strongest growth in domestic demand (e.g. Spain, Greece).

Restoring sustained growth requires real currency depreciation.

This structure contrasts with the pre 1980 business cycle, which rested on wage growth tied to productivity growth and full employment.

The developing world is not doing much better. As the International Labor Organization s latest Global Wage Report shows, wage gains are lagging far behind productivity growth.

So economic growth the rise in real incomes slows.

Real GDP growth in 2007 was 6.0 per cent.

The resulting rise in output per worker, together with slow wage growth, reduced unit labor costs.

The second classical postulate Keynes identified was that the real wage is equal to the marginal disutility of labor.

Real growth has averaged 7 for eight years, and real incomes have grown by roughly 10 per year.

The share of real growth in the main emerging countries nominal US dollar GDP growth was 20 .

Since 1980, average real hourly compensation has increased at an annual rate of 1 , or half the rate of productivity growth. Wage gains have also become considerably more unequal, with the biggest increases claimed by the top 10 of earners.

Without its own currency, the only cure for a chronic trade deficit is real wage reductions or relative productivity increases.

And even a real wage increase on the national level will not undermine competitiveness if labor productivity grows still faster.

(c) Real growth, positive or negative, compared with the previous budget

(c) Real growth, positive or negative, compared with the previous budget

(c) Real growth, positive or negative, compared with the previous budget

(c) Real growth, positive or negative, compared with the previous budget

1 In 2004, Guatemala reverted to real per capita GDP growth.

Productivity growth at the historical rate of 0.7 in Germany, with wage growth of 4 , would be compatible with an inflation rate a little above 3 .

There are finally some signs that Germany will welcome more rapid domestic wage growth and somewhat higher inflation.

While productivity growth usually is measured in fractions of a percentage point, wage increases have been much larger.

The alternative is muted wage and income growth shared across the income spectrum, combined with productivity enhancing measures.

Unit labor costs reflect compensation levels and productivity gains in productivity can offset the effect of wage growth.

That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth.

But there is little empirical evidence that public sector wages have a significant impact on private sector wage growth.

The American Employment Cost index and other indicators of developed country nominal wage growth show no acceleration of change.

Fourth, private consumption growth in the last few quarters does not reflect growth in real wages (which are actually falling).

But such adjustments cannot happen in a monetary union, so unit labor costs are slowly re converging via a protracted process of flat nominal wage growth and slowly declining real wages (a process that would be quicker with higher inflation in Germany and Northern Europe).

The more trade unions defend existing wage structures, and the lower productivity growth is, the longer the slump will be.

Provinces with high levels of private insurance coverage, on the other hand, had lower employment rates and slower wage growth.

But it would not require falling wages or significant price deflation annual wage growth of 1.7 and productivity growth of 2 would be compatible with inflation close to zero.

In the same vein, pensioners real incomes increased more than 30 on average over the past eight years, reflecting aggressive minimum wage increases.

In real terms, wages no longer rose (indeed, the average real wage has been stagnant for 25 years in the US), and a growing share of manpower (currently around 15 ) was without steady employment.