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EMU: What if the Shocks are in the Labor Markets?

Author

Listed:
  • Gil Mehrez

    (Georgetown University)

  • Natacha Valla

    (European University Institute)

Abstract

This paper argues that labor markets across Europe vary dramatically in their fundamentals features and rigidities across Europe. Thus, any discussion of an optimum currency area should focus on the differences and the idiosyncratic changes in the labor markets. After demonstrating the vast differences and changes in the labor markets across Europe, we construct a model with differential goods, monopolistic competition, free trade and labor market rigidities. We show that a change in labor market features in one country, such as a change in the unemployment benefits, affects the equilibrium unemployment and real wages in both countries. Independent monetary policy, i.e., having distinct currencies, can be used to control the speed of adjustment to the new equilibrium. An active monetary policy can speed the adjustment to an equilibrium with low unemployment following a positive change in the labor market.

Suggested Citation

  • Gil Mehrez & Natacha Valla, 1998. "EMU: What if the Shocks are in the Labor Markets?," International Finance 9803001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpif:9803001
    Note: Type of Document - WordPerfect; prepared on IBM PC; to print on HP; pages: 35 ; figures: included
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    References listed on IDEAS

    as
    1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," NBER Chapters,in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
    2. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
    3. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 255-283.
    4. Lawrence F. Katz & Gary W. Loveman & David G. Blanchflower, 1995. "A Comparison of Changes in the Structure of Wages in Four OECD Countries," NBER Chapters,in: Differences and Changes in Wage Structures, pages 25-66 National Bureau of Economic Research, Inc.
    5. Siebert, Horst, 1997. "Labor market rigidities and unemployment in Europe," Kiel Working Papers 787, Kiel Institute for the World Economy (IfW).
    6. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, May.
    7. Decressin, Jorg & Fatas, Antonio, 1995. "Regional labor market dynamics in Europe," European Economic Review, Elsevier, vol. 39(9), pages 1627-1655, December.
    8. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    9. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
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    11. Francine D. Blau & Lawrence Kahn, 1995. "The Gender Earnings Gap: Some International Evidence," NBER Chapters,in: Differences and Changes in Wage Structures, pages 105-144 National Bureau of Economic Research, Inc.
    12. Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1.
    13. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 55-74, Summer.
    14. Bayoumi, Tamim & Eichengreen, Barry, 1996. "Operationalizing the Theory of Optimum Currency Areas," CEPR Discussion Papers 1484, C.E.P.R. Discussion Papers.
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    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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