Welfare Implications of Heterogeneous Labor Markets in a Currency Area

Céline Poilly () and Jean-Guillaume Sahuc

Working papers from Banque de France

Abstract: This paper investigates the role of labor markets heterogeneity in a monetary union and especially what are the welfare gains/costs of labor market reforms for each member of the area. To this end, we develop a medium-scale two-country model representing a currency union characterized by price and wage stickiness, real rigidities and labor market frictions. We make various scenarios of labor market reform and seek to determine the direction in which a country has an incentive to direct it from a welfare perspective. We find that the choice of the instrument to direct a reform (aiming at reducing the home unemployment rate) has drastic welfare implications in the union. Reforming the domestic labor market by a stronger regulation seems to give the best output. The analysis also shows that labor markets heterogeneity has sizeable effects on the amount of welfare gains, following a reform. The more flexible the foreign labor market, the higher its welfare. Finally, a sensitivity analysis shows that (i) the way the monetary authorities conduct their policy has negligible welfare effects but (ii) the size of a country in the monetary union is far to be neutral.

Keywords: DSGE model; Currency union; Heterogeneity; Matching frictions; Welfare. (search for similar items in EconPapers)
JEL-codes: C3 C5 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: WELFARE IMPLICATIONS OF HETEROGENEOUS LABOR MARKETS IN A CURRENCY AREA (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:199

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