Kiel Working Papers, Kiel Institute for World Economics
No 1331:
Labour Market Asymmetries in a Monetary Union
Torben M. Andersen and Martin Seneca
Abstract: This paper takes a first step in analysing how a monetary
union performs in the presence of labour market asymmetries. Differences in
wage flexibility, market power and country sizes are allowed for in a
setting with both country-specific and aggregate shocks. The implications
of asymmetries for both the overall performance of the monetary union and
the country-specific situation are analysed. It is shown that asymmetries
can have important effects, and that there are substantial spill-over
effects. Among other things, it is found that aggregate output volatility
is not strictly increasing in nominal rigidity but hump-shaped. A
disproportionate share of the consequences of wage inflexibility may fall
on small countries. In the case of country-specific shocks a country
unambiguously benefits in terms of macroeconomic stability by becoming more
flexible, but in general an inflexible country does not necessarily achieve
more output stability by becoming more flexible. As this may be desirable
for the monetary union as a whole, there is a risk of a ’reform deficit’ in
an asymmetric monetary union.
Keywords: wage formation, nominal wage rigidity, staggered contracts, monetary policy, monetary union, business cycles, shocks; (follow links to similar papers)
JEL-Codes: E30,; E52,; F41; (follow links to similar papers)
36 pages, June 2007
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