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Monetary Regimes, Labour Mobility and Equilibrium Employment

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  • Larsson, Anna

    (Institute for International Economic Studies, Stockholm University)

Abstract

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.

Suggested Citation

  • Larsson, Anna, 2006. "Monetary Regimes, Labour Mobility and Equilibrium Employment," Seminar Papers 745, Stockholm University, Institute for International Economic Studies.
    • Handle: RePEc:hhs:iiessp:0745
    as

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    References listed on IDEAS

    as
    1. Francesco Lippi, 2003. "Strategic Monetary Policy with Non-Atomistic Wage Setters," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 909-919.
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    6. Cukierman, Alex & Lippi, Francesco, 1999. "Central bank independence, centralization of wage bargaining, inflation and unemployment:: Theory and some evidence," European Economic Review, Elsevier, vol. 43(7), pages 1395-1434, June.
    7. Lars Calmfors, 2001. "Wages and Wage-Bargaining Institutions in the Emu : A Survey of the Issues," CESifo Working Paper Series 520, CESifo.
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    More about this item

    Keywords

    Inflation Targeting; Monetary Union; Equilibrium Employment; Labour Mobility;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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