Macroeconomic Policy, Wage Setting, and Employment--What Difference Does the EMU Make?
Research Institute of Industrial Economics; IIES
Oxford Review of Economic Policy, Vol. 14, No. 3, Autumn 1998
The likely impact of the EMU on the variability and level of employment is analyzed. The major conclusions are as follows: (i) Although an inflation-target regime will constrain monetary policy of a non-participant in the EMU, it still leaves considerable scope for exchange-rate changes in the case of country-specific demand shocks, provided that there is some nominal price and wage flexibility. (ii) Variations in payroll taxes can be used as a substitute for exchange-rate changes in the EMU, but it will be an imperfect substitute. (iii) Money-wage flexibility is likely to be larger inside than outside the EMU, but probably not by much. (iv) There are various mechanisms through which the EMU may affect the incentives for labor-market reform to reduce equilibrium unemployment, but the net impact is highly uncertain.
JEL Classification: J38, J64, J68
Date posted: March 24, 1999
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