Seminar Papers, Institute for International Economic Studies, Stockholm University
No 745:
Monetary Regimes, Labour Mobility and Equilibrium Employment
Anna Larsson
Abstract: This paper analyses the impact of the monetary regime on
labour markets in a small open economy, by considering the game between
large wage setters and an independent central bank in a two-sector model
with potential labour mobility between sectors. Two monetary regimes are
considered: membership in a monetary union and an inflation target combined
with a flexible exchange rate. A key result is that when there is perfect
labour mobility between sectors, the monetary regime does not matter for
real wages, employment or profits. Moreover, introducing labour mobility
substantially reduces wages and increases employment. Other findings are
that when labour is immobile between sectors: (i) the real wage in the
tradables sector is higher under inflation targeting than in a monetary
union, while the reverse applies to the non-tradables sector; (ii)
inflation targeting generates higher employment and profits than membership
in a monetary union; and (iii) both workers and firms in the two sectors in
general prefer inflation targeting to membership in a monetary union.
Keywords: Inflation Targeting; Monetary Union; Equilibrium Employment; Labour Mobility; (follow links to similar papers)
JEL-Codes: E24; J50; (follow links to similar papers)
37 pages, May 2, 2006
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