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

  • MIRKO ABBRITTI
  • ANDREAS I. MUELLER

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.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 45 (2013)
Issue (Month): 6 (09)
Pages: 1165-1186

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Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:6:p:1165-1186
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  1. Poilly, C. & Sahuc, J-G., 2008. "Welfare Implications of Heterogeneous Labor Markets in a Currency Area," Working papers 199, Banque de France.
  2. Torben M. Andersen & Martin Seneca, 2007. "Labour Market Asymmetries in a Monetary Union," Kiel Working Papers 1331, Kiel Institute for the World Economy.
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  9. Michael U. Krause & Thomas A. Lubik & David López-Salido, 2008. "Inflation dynamics with search frictions : a structural econometric analysis," Working Paper 08-01, Federal Reserve Bank of Richmond.
  10. Francesco Zanetti, 2006. "Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model," Computing in Economics and Finance 2006 445, Society for Computational Economics.
  11. Harris Dellas & George Tavlas, 2004. "Wage Rigidity and Monetary Union," Working Papers 12, Bank of Greece.
  12. Olivier Blanchard, 2006. "European unemployment: the evolution of facts and ideas," Economic Policy, CEPR;CES;MSH, vol. 21(45), pages 5-59, 01.
  13. Krause, Michael & López-Salido, José David & Lubik, Thomas A., 2007. "Do Search Frictions Matter for Inflation Dynamics?," Kiel Working Papers 1353, Kiel Institute for the World Economy (IfW).
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  15. Abbritti, Mirko & Weber, Sebastian, 2010. "Labor market institutions and the business cycle Unemployment rigidities vs. real wage rigidities," Working Paper Series 1183, European Central Bank.
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