A Quantitative Macroeconomic Analysis: Determinants of Compensation and Labour Cost Dynamics across EU-Member States

Wage and compensation disparities across European Union member states remain large and persistent despite decades of economic integration. Main question of this thesis: To what extent do macroeconomic factors, including labour productivity, the unemployment rate, the price level, and trade openness, explain within-country variations in compensation per employee across EU member states between 2002 and 2023? Sub-question examines how nominal unit labour costs have evolved in relation to productivity over the same period. Using a panel fixed effects model, the analysis finds that labour productivity, the unemployment rate, the price level measured by HICP, and trade openness are all statistically significant determinants of compensation growth at the 1 percent level, jointly explaining approximately 36 percent of within-country variation. Labour productivity shows an elasticity of 0.58 at the full panel level, rising to near one-to-one in CEE economies, revealing a structural divide in how compensation responds to macroeconomic conditions across country groups. The descriptive analysis of nominal unit labour costs finds that compensation growth consistently outpaced productivity growth in both Western EU and CEE economies across all four macroeconomic sub-periods examined, with the gap widening sharply after 2020 in CEE. The findings confirm that macroeconomic fundamentals drive compensation differently across EU country groups, and that rising nominal unit labour costs in catching-up economies reflect convergence dynamics rather than unsustainable wage inflation.