Increasingly unequal? Convergence of real wages in the EU

Abstract: The European union has taken steps to remove obstacles for labor mobility and per neoclassical economic theory this should lead to an equalisation of the real wages through an increase in labor mobility. Real wages is an important indicator of welfare and the equalisation process is called convergence by economists. This thesis looks closer at the convergence process in the European Union during 1997 to 2015 for the EU-27. The topics of interests are; have real wage convergence taken place, is this process affected by the Eurozone crisis and do real wage growth similarities cause countries to group up in so called "Convergence clubs". Classic convergence measurements such as sigma-convergence and beta-convergence is used to measure the reduction of disparities and the "Catch-up" process of weaker economies. Cluster analysis is employed to identify "convergence clubs" and the more modern time-series approach is used to determine the convergence properties of these clubs. The results indicate that real wage convergence has occurred in the European union during the period of interest. This convergence process was negatively affected by the Eurozone crisis as a result of stalled labor mobility. Two convergence clubs are identified and they consist of a high income club and a low income club. The low income club will not "catch-up" to the real wage level of the high income club.