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

  • Gil Mehrez

    (Georgetown University)

  • Natacha Valla

    (European University Institute)

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.

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Paper provided by EconWPA in its series International Finance with number 9803001.

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Length: 35 pages
Date of creation: 09 Mar 1998
Date of revision:
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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  1. Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1, December.
  2. 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.
  3. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, July.
  5. Lawrence F. Katz & Gary W. Loveman & David G. Blanchflower, 1993. "A Comparison of Changes in the Structure of Wages," NBER Working Papers 4297, National Bureau of Economic Research, Inc.
  6. Blanchflower, David G & Oswald, Andrew J, 1990. " The Wage Curve," Scandinavian Journal of Economics, Wiley Blackwell, vol. 92(2), pages 215-35.
    • David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, June.
  7. Decressin, Jörg & Fatás, Antonio, 1994. "Regional Labour Market Dynamics in Europe," CEPR Discussion Papers 1085, C.E.P.R. Discussion Papers.
  8. Horst Siebert, 1997. "Labor Market Rigidities: At the Root of Unemployment in Europe," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 37-54, Summer.
  9. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
  10. 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.
  11. repec:tpr:qjecon:v:105:y:1990:i:2:p:255-83 is not listed on IDEAS
  12. 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.
  13. Yellen, Janet L, 1984. "Efficiency Wage Models of Unemployment," American Economic Review, American Economic Association, vol. 74(2), pages 200-205, May.
  14. Bayoumi, Tamim & Eichengreen, Barry, 1996. "Operationalizing the Theory of Optimum Currency Areas," CEPR Discussion Papers 1484, C.E.P.R. Discussion Papers.
  15. 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.
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