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

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  • MIRKO ABBRITTI
  • ANDREAS I. MUELLER

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.

Suggested Citation

  • Mirko Abbritti & Andreas I. Mueller, 2013. "Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1165-1186, September.
    • Handle: RePEc:wly:jmoncb:v:45:y:2013:i:6:p:1165-1186
    DOI: 10.1111/jmcb.12048
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    Cited by:

    1. Giovannini, Massimo & Hohberger, Stefan & Ratto, Marco & Vogel, Lukas, 2018. "Adjustment dynamics and business cycle heterogeneity in the EMU: Evidence from estimated DSGE models," Working Papers 2018-08, Joint Research Centre, European Commission.
    2. Mirko Abbritti & Mr. Sebastian Weber, 2019. "Market Regulation, Cycles and Growth in a Monetary Union," IMF Working Papers 2019/123, International Monetary Fund.
    3. Jocelyn Maillard, 2020. "Heterogeneity, Rigidity and Convergence of Labor Markets in the Euro Area," Annals of Economics and Statistics, GENES, issue 140, pages 127-167.
    4. Kolasa, Marcin & Rubaszek, Michał & Walerych, Małgorzata, 2021. "Do flexible working hours amplify or stabilize unemployment fluctuations?," European Economic Review, Elsevier, vol. 131(C).
    5. Nikolas Kontogiannis, 2015. "Optimal monetary policy in a currency union with labour market heterogeneity," Working Papers 2015.04, International Network for Economic Research - INFER.
    6. Josué Diwambuena & Raquel Fonseca & Stefan Schubert, 2023. "Labor Market Institutions, Productivity, and the Business Cycle: An Application to Italy," Cahiers de recherche / Working Papers 2302, Chaire de recherche sur les enjeux économiques intergénérationnels / Research Chair in Intergenerational Economics.
    7. Paweł Borys & Paweł Doligalski & Paweł Kopiec, 2018. "Labor market institutions in a shopping economy," NBP Working Papers 275, Narodowy Bank Polski.
    8. repec:zbw:bofrdp:2019_024 is not listed on IDEAS
    9. Poilly, Céline & Wesselbaum, Dennis, 2014. "Evaluating labor market reforms: A normative analysis," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 156-170.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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