Currency devaluation with dual labor market: Which perspectives for the Euro Zone ?

Amélie Barbier-Gauchard (), Francesco De Palma and Giuseppe Diana

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: In this paper, we assume a world of two countries in a fixed exchange rate system. The main difference between the two countries lies in the features of their labor markets. In the home country, we assume the existence of a dual labor market, with formal and informal sectors. In the foreign country, the labor market is homogeneous and characterized by a nominal wage rigidity. In this context, the situation of labor market in each country is not optimal through a misallocation of workers between sectors in domestic economy, and unemployment in foreign economy. Our article shows that a devaluation of domestic currency implies a fall in production in each country, an increase in unemployment in foreign economy and a worse reallocation of workers by a growth of informal sector in domestic economy.

Keywords: efficiency wage; dualism; exchange rate; devaluation. (search for similar items in EconPapers)
JEL-codes: F16 F41 J31 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-iue, nep-lab and nep-opm
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2012-04

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