This paper reviews trends in labor productivity, wage growth, unemployment and
inequality over the past two decades in nine advanced countries. We focus on the two
largest countries in the eurozone, Germany and France, which experienced similar
increases in productivity over the past 20 years. In France wages grew in tandem with
productivity, inequality declined and unemployment remains stubbornly high. In
Germany, in contrast, wages largely stagnated (until 2008), inequality increased (until
2010), but unemployment is now at a record low. This paper argues that the divergent
development of Germany and France is in part a consequence of an unprecedented
decentralization of the wage-setting process in Germany, from the sectoral level down
to the level of the firm or the individual. In contrast, the distinctive characteristics of
France’s system of industrial relations prevented France from a similar downward
adjustment of wage