Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials

Mirko Abbritti and Andreas Mueller

No 6488, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: How does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks? To answer this question, this paper sets up a dynamic currency union model with monopolistic competition and sticky prices, hiring frictions and real wage rigidities. In our analysis, we focus on the differentials in inflation and unemployment between countries, as they directly reflect how the currency union responds to shocks. We highlight the following three results: First, we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials. Second, we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials. Finally, we show that it is important to take into account the interaction between different types of labor market rigidities. Overall, our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks.

Keywords: unemployment; inflation differentials; currency union; labor market frictions; real wage rigidities; sticky prices (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-04
New Economics Papers: this item is included in nep-eec, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published - published in: Journal of Money, Credit and Banking, 2013, 45 (6), 1165-1186

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Journal Article: Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials (2013)
Journal Article: Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials (2013)
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