Research Discussion Papers, Bank of Finland
No 11/2003:
Labour market flexibility and policy coordination in a monetary union
Anssi Rantala
Abstract: Sufficiently flexible labour markets are considered an
important precondition for countries to benefit from membership in the
monetary union. Economic policy coordination within the European Community
is extensive and includes issues related to labour market structures. In
this paper we study the determination of flexibility of the labour market
and, ultimately, of wages in a member country of the monetary union. As a
starting point, the analysis assumes that each country’s government, in
formulating its labour market policy, decides the degree of nominal wage
flexibility in light of the fact that this involves political costs that
increase with the degree of wage flexibility. The study then focuses on the
effects of monetary union membership on each country’s prospects for
coordination of economic policies – specifically labour market policies.
The study shows that coordination of labour market policies contributes to
greater nominal wage flexibility in member countries. However, coordination
of labour market policies will be effective only if unemployment is
persistent or under discretionary monetary policy. From the perspective of
macroeconomic stability, there is no particular need for coordinating
labour market policies among member countries if the common central bank
can credibly precommit to a low inflation target or if fluctuations in
unemployment are white noise.
Keywords: wage flexibility; economic policy coordination; credibility; precommitment; (follow links to similar papers)
JEL-Codes: E52; E58; E61; J51; (follow links to similar papers)
52 pages, May 7, 2003
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
0311.pdf 
Download Statistics
Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
