In a number of European countries, economies have gradually returned to growth following the Financial Crisis.
In 2009, growth in the EU was at 24.39 per cent and from 2012, when GDP growth was 20.4 per cent, GDP accelerated reaching 0.26 per cent in 2013, 2.3 per cent in 2015 and 2.4 per cent in 2017. Despite growth in the EU and unemployment rates falling to an average of around 4 per cent across the EU27, it seems that people in Europe did not feel better off. One of the reasons might be the sluggishness of wage growth. Wage growth in 2015 and 2016 was around 1.2 per cent and in 2018, it was reported at 2.0 per cent. With stronger growth and falling unemployment it might be expected that the rate of wage growth would start to pick up, but this does not appear to have happened.
One of the explanations for the rate of wage growth being so sluggish is sticky wages. However, this has been called into question by some commentators. For example, Josh Bersin, an industry analyst and researcher in corporate human resources management, points to what he argues is a ‘flaw’ in the theory of sticky wages. One of the points he notes is that in a skills-based economy, companies bid up wages to get access to the best people.
People want to work for these companies and are more committed to them because they pay good wages, and their ‘employment brand’ becomes positive. These well-paid people, being more committed and more skilled, are also more productive and contribute more to these companies’ profits.
In times of economic downturn, the more savvy companies avoid laying off too many workers. Research suggests that firms that do lay off workers are more likely to underperform in later years. Part of the reason for retaining workers in a slowdown is that they are more committed to helping the company get out of a slowdown because they are paid and treated well.
Bersin argues that sticky wages are more of a management problem than an economic one.
Management, he argues, can see labour costs as a cost to be managed as opposed to an investment. He notes that labour can be an appreciating asset rather than a depreciating one, and investment into labour can yield dividends to firms in the future, giving them a competitive advantage over rivals who approach labour costs in a more traditional way.

Critical Thinking Questions
1 Using your understanding of the model of AD and AS, explain what factors could have caused a return to economic growth across the EU, and what the model would tell you should happen to inflation and unemployment.
How does the outcome of the modelling you have used differ from the experience of the EU in recent years?
2 Despite accelerating growth and a fall in unemployment, it is said that ‘People across Europe do not feel better off’. What explanations can you give for this?
3 Sticky wage theory might explain why wages are slow to fall in a period of economic slowdown, but can they also explain why wages are slow to rise in a period of economic growth?
4 Can the flaw in the theory of sticky wages outlined by Bersin be explained by the theory of efficiency wages?
5 ‘Labour is not a cost to be managed but an asset to be invested in.’ Do you agree? Using your knowledge of the theory of the labour market and the model of aggregate demand and aggregate supply, explain what might happen to an economy in initial equilibrium if firms in general invested heavily in their labour force in the way Bersin suggests some top companies do.