What matters most for competitiveness: Costs or skills?

We examine the issue of the euro-zone countries’ competitiveness . By construction , they have the same exchange rate. There are two views of the determinants of competitiveness: That it depends mainly on production costs. This is the usual approach. For a euro-zone country with a competitiveness problem, it leads to the recommendation of an internal devaluation (a reduction in labour costs); That it depends mainly on labour force skills. A euro-zone country with a competitiveness problem should then first an d foremost improve its education and vocational training systems. We weigh up these two theories by looking at the extent to which changes in the weight of industry, market shares and manufacturing employment are linked to the level of production costs or skills across euro-zone countries . We find that euro-zone countries’ overall competitiveness is linked to both labour costs and skills, but more strongly to the latter than the former .