Asymmetric labor market
institutions in the EMU and the
volatility of inflation and
unemployment differentials
By Mirko Abbritti and Andreas Mueller
Discussion by Leo de Haan
DNB/IMF workshop on preventing and correcting
macroeconomic imbalances in the euro area
Amsterdam 13-14 October 2011
Contribution
•
It is important to distinguish between different labor
market rigidities in a currency union:
1. Unemployment rigidities (UR)
2. Real wage rigidities (RWR)
Phillips curve
UR
RWR
Steeper
Flatter
Question 1
Phillips curve
UR
RWR
Steeper
Flatter
• Policy implication?
• Stimulate union wide RWR for flatter Phillips curve?
Analysis scheme
• Currency union: Home region + Foreign region
Symmetric
shock
Symmetric labor market
structure
Asymmetric labor market
structure
Asymmetric
shock
Case 1
Case 2
Case 3
Case 1: Asymmetric shock with
symmetric labor market structure
• Finding: UR and RWR have different effects on inflation
and unemployment differentials
UR
RWR
Volatility inflation
differentials
+
0
Volatility unemployment
differentials
-
+
Question 2
Volatility inflation
differentials
Volatility unemployment
differentials
UR
RWR
+
0
-
+
• Policy implication?
• Stimulate union wide UR for lower unemployment
differentials due to asymmetric shocks?
Case 2: Symmetric shock with
asymmetric labor market structure
• Finding: Asymmetries in labor market structures
deteriorate adjustment of currency union to symmetric
shocks
UR
asymmetry
RWR
asymmetry
Volatility inflation
differentials
++
+
Volatility unemployment
differentials
+
++
Paper makes policy implication clear
Volatility inflation
differentials
Volatility unemployment
differentials
UR
asymmetry
RWR
asymmetry
++
+
+
++
• Remove all labor market asymmetries. Because they
deteriorate adjustment to symmetric shocks.
New dimension:
Two types of labor market asymmetry
‘Complements’
Home
Foreign
UR
+
-
RWR
+
-
‘Substitutes’
Home
Foreign
UR
+
-
RWR
-
+
‘Complements’
Home
Foreign
UR
-
+
RWR
-
+
‘Substitutes’
Home
Foreign
UR
-
+
RWR
+
-
Case of (any kind of) shock with
asymmetric labor market structure
• => ‘Substitutes’ enforce effects of labor
market asymmetries, while ‘complements’
offset them
Complements Substitutes
Volatility inflation
differentials
+
+++
Volatility unemployment
differentials
+
+++
Question 3
Complements Substitutes
Volatility inflation
differentials
Volatility unemployment
differentials
+
+++
+
+++
• Policy implication?
• Remove labor market asymmetries only/especially when
these are substitutes?
Two general comments
General comment 1
• Paper focuses on volatilities of inflation and
unemployment differentials
• However, policy focuses more on size and
persistence of differentials
• Are these two analytical concepts fully
compatible?
General comment 2
• Which policy trade-off between:
• Volatility of inflation differentials
• Volatility of unemployment differentials*
* Complication: how to define ‘inefficient part’ of unemployment
fluctuations in real world?