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Why could Northern labor market flexibility save the eurozone?

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  • Amélie Barbier-Gauchard
  • Francesco de Palma
  • Giuseppe Diana

    ()
    (LaRGE Research Center, Université de Strasbourg)

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    Abstract

    We consider a heterogeneous labor market in a two-country monetary union. The domestic economy is characterized by a dual labor market with formal and informal sectors as observed in most Southern EMU economies. Among formal workers, wage-levels result from efficiency considerations. In the foreign economy, with reference to Northern EMU economies, we assume another type of wage rigidity explained by the presence of unions. More precisely, only wages are bargained between firms and employees as in the right-to-manage model. These rigidities lead to inefficient allocations of workers in each country: a misallocation of workers among sectors in the domestic country and unemployment in the foreign one. In this context, the labor market flexibilization may appear as a relevant option for improving the situation of activity and employment in the monetary union. This is the reason why we investigate the overall effects of a decrease in trade union bargaining power in the foreign (Northern) economy. We show that, at the new equilibrium, a lower bargaining power in the foreign economy leads to a decrease in all prices and the effects are positive overall. In the foreign economy, the equilibrium level of production is higher, unemployment decreases and wages are lower. In the domestic one, the production also increases, the labor market benefits from a better allocation of workers between formal and informal sectors, and all wages are higher.

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    Paper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2013-08.

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    Date of creation: 2013
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    Handle: RePEc:lar:wpaper:2013-08

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    Keywords: efficiency wage; dualism; EMU; trade unions; bargaining.;

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    1. Krebs, Tom & Scheffel, Martin, 2012. "Macroeconomic Evaluation of Labor Market Reform in Germany," Working Papers 12-23, University of Mannheim, Department of Economics.
    2. Hazans, Mihails, 2011. "Informal workers across Europe : evidence from 30 European countries," Policy Research Working Paper Series 5912, The World Bank.
    3. Friedrich Schneider & Andreas Buehn & Claudio E. Montenegro, 2010. "Shadow Economies All over the World: New Estimates for 162 Countries from 1999 to 2007," Working Papers wp322, University of Chile, Department of Economics.
    4. Samuel Bentolila & Juan J. Dolado & Juan F. Jimeno, 2012. "The New New Labour Market Reform in Spain: Objectives, Instruments, and Shortcomings," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 10(2), pages 03-07, 08.
    5. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, September.
    6. Michael C. Burda & Jennifer Hunt, 2011. "What Explains the German Labor Market Miracle in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 273-335.
    7. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    8. Zenou,Yves, 2009. "Urban Labor Economics," Cambridge Books, Cambridge University Press, number 9780521698221, April.
    9. Philippe Askenazy & Christine Erhel, 2012. "The French Labour Market and the (Not So) Great Recession," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 10(2), pages 08-13, 08.
    10. Bispinck, Reinhard & Dribbusch, Heiner & Schulten, Thorsten, 2010. "German collective bargaining in a European perspective: Continuous erosion or re-stabilisation of multi-employer agreements?," WSI Discussion Papers 171, Wirtschafts- und Sozialwissenschaftliches Institut (WSI), Hans-Böckler-Stiftung.
    11. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
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