Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials

28 Pages Posted: 21 Apr 2012

See all articles by Mirko Abbritti

Mirko Abbritti

University of Navarra

Andreas I. Mueller

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Abstract

How does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks? To answer this question, this paper sets up a dynamic currency union model with monopolistic competition and sticky prices, hiring frictions and real wage rigidities. In our analysis, we focus on the differentials in inflation and unemployment between countries, as they directly reflect how the currency union responds to shocks. We highlight the following three results: First, we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials. Second, we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials. Finally, we show that it is important to take into account the interaction between different types of labor market rigidities. Overall, our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks.

Keywords: currency union, labor market frictions, real wage rigidities, unemployment, sticky prices, inflation differentials

JEL Classification: E32, E52, F41

Suggested Citation

Abbritti, Mirko and Mueller, Andreas I., Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials. IZA Discussion Paper No. 6488, Available at SSRN: https://ssrn.com/abstract=2043490

Mirko Abbritti (Contact Author)

University of Navarra ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

Andreas I. Mueller

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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