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It is important to remember that labour market functioning had changed when debt ratios began to rise
The functioning of labour markets in OECD countries began to change in the late 1990s as wage earners lost bargaining power. This resulted in a slowdown in labour costs and in a decline in inflation. The decline in inflation allowed central banks in OECD countries to keep interest rates low relative to the growth rate, which fuelled increases first in private debt and then in public debt. A return to the previous functioning of labour markets, brought about for example by a change of government and economic policy, would therefore give rise to a major financial problem, as it would drive up inflation and interest rates (unless central banks decided to not react to the inflation and kept nominal interest rates significantly below nominal growth) to levels incompatible with the very high level of debt. Labour markets therefore hold the key to financial stability in OECD countries.
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Patrick Artus
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