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Why should Southern economies stay in the Euro Zone? The role of labor markets

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  • Barbier-Gauchard, Amélie
  • De Palma, Francesco
  • Diana, Giuseppe

Abstract

We assume a world of two countries in a fixed exchange rate system. These countries differ in the features of their labor markets. The home country is characterized by a dual labor market, with formal and informal sectors. In the foreign country, a nominal wage rigidity exists. In this context, the situation of the labor markets in each country is not optimal owing to a misallocation of workers between sectors in the domestic economy and unemployment in the foreign economy. We show that a devaluation of domestic currency implies a fall in production in each country and deterioration of labor markets in both countries.

Suggested Citation

  • Barbier-Gauchard, Amélie & De Palma, Francesco & Diana, Giuseppe, 2014. "Why should Southern economies stay in the Euro Zone? The role of labor markets," Economic Modelling, Elsevier, vol. 43(C), pages 201-208.
    • Handle: RePEc:eee:ecmode:v:43:y:2014:i:c:p:201-208
    DOI: 10.1016/j.econmod.2014.07.046
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    References listed on IDEAS

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