Monetary Regimes, Labour Mobility and Equilibrium Employment
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Anna Larsson: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Authors registered in the RePEc Author Service: Anna Seim ()
No 745, Seminar Papers from Stockholm University, Institute for International Economic Studies
This paper analyses the impact of the monetary regime on labour markets in a small open economy, by considering the game between large wage setters and an independent central bank in a two-sector model with potential labour mobility between sectors. Two monetary regimes are considered: membership in a monetary union and an inflation target combined with a flexible exchange rate. A key result is that when there is perfect labour mobility between sectors, the monetary regime does not matter for real wages, employment or profits. Moreover, introducing labour mobility substantially reduces wages and increases employment. Other findings are that when labour is immobile between sectors: (i) the real wage in the tradables sector is higher under inflation targeting than in a monetary union, while the reverse applies to the non-tradables sector; (ii) inflation targeting generates higher employment and profits than membership in a monetary union; and (iii) both workers and firms in the two sectors in general prefer inflation targeting to membership in a monetary union.
Keywords: Inflation Targeting; Monetary Union; Equilibrium Employment; Labour Mobility (search for similar items in EconPapers)
JEL-codes: E24 J50 (search for similar items in EconPapers)
Pages: 37 pages
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iiessp:0745
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