Labour Market Asymmetries in a Monetary Union

33 Pages Posted: 12 Jun 2008

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Martin Seneca

Independent

Date Written: April 2008

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 are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, 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, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.

Keywords: business cycles, monetary policy, monetary union, nominal wage rigidity, shocks, staggered contracts, wage formation

JEL Classification: E30, E52, F41

Suggested Citation

Andersen, Torben M. and Seneca, Martin, Labour Market Asymmetries in a Monetary Union (April 2008). CEPR Discussion Paper No. DP6800, Available at SSRN: https://ssrn.com/abstract=1143163

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Martin Seneca

Independent ( email )

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