Open Economies Review

, Volume 21, Issue 4, pp 483–514 | Cite as

Labour Market Asymmetries in a Monetary Union

Research Article

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

Wage formation Nominal wage rigidity Staggered contracts Monetary policy Monetary union Business cycles Shocks 

JEL Classification

E30 E52 F41 

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.School of Economics and ManagementUniversity of AarhusArhusDenmark
  2. 2.CEPRLondonUK
  3. 3.EPRUCopenhagenDenmark
  4. 4.IZABonnGermany
  5. 5.Central Bank of IcelandReykjavikIceland

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