Do wages reflect labor productivity? The case of Belgian regions

Abstract

Classic economic theory applied to the labor market assumes that markets are perfectly informed and able to allocate workers in open vacancies in equilibrium. These workers are paid a salary equal to their marginal product of labor, since labor supply and demand are both satisfied. In the real world, however, this condition might not hold, as there exist many market frictions triggered by imperfect information and institutional factors, such as employment protection, unemployment benefits, collective bargaining, minimum wages and taxation. The persistently high unemployment rates plaguing the Western World, and Europe in particular in the aftermath of the Great Recession suggest that wage rigidity combined with falling productivity may be an important channel causing increasing unemployment. Belgium is no exception, with 7.6% national unemployment rate in 2012 averaging over the 17.4% unemployment rate of Brussels, the 4.5% rate of Flanders and the 10.0% rate of Wallonia (source: Eurostat)...