Seminar Papers,
Stockholm University, Institute for International Economic Studies

Abstract: The paper analyses various mechanism through which monetary union in Europe may affect unemployment. The focus is on the political incentives for labour-market reform. There will be more reform outside than inside the EMU to the extent that a national inflation bias can be reduced. But if there is a precautionary motive for low average unemployment in order to reduce the utility cost of macroeconomic variability, there could be more reform in a monetary union. Labour-market reform to increase wage flexibility as a substitute for domestic monetary policy and transition costs of reform are also analysed. The net effect of monetary union on unemployment is ambiguous.

Keywords: monetary union; labour-market reform; equilibrium unemployment; discretionary monetary policy; asymmetric shocks

JEL-codes: E58; E69; F33; J29

35 pages, April 1, 1998

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