Country Size and Labor Market Flexibility in the European Monetary Union: Why Small Countries Have more Flexible Labor Markets

Zemanek, Holger (2009): Country Size and Labor Market Flexibility in the European Monetary Union: Why Small Countries Have more Flexible Labor Markets.

Abstract

This paper explores the impact of country size on labor market flexibility in a monetary union with a common monetary policy as conducted in EMU. I apply a Barro-Gordon framework and test its result empirically for EMU. Results confirm that small countries demand higher labor market flexibility than large countries. Small countries use labor market flexibility to be protected against monetary policy in favor of large countries and use flexibility as a substitute for monetary policy. Thereby, national inflation volatilities and unemployment volatility are important determinants. Business cycle synchronization reduces the need of small countries for additional labor market flexibility.

• Item Type: MPRA Paper
• Language: English
• Keywords: Structural reforms; labor market flexibility; European Monetary Union; country size; Barro-Gordon model; business cycle synchronization
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D78 - Positive Analysis of Policy Formulation and Implementation; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination

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