Wages and Unemployment in the European Economic and Monetary Union:
A theoretical analysis 
(with Oliver Büsse)
University of Regensburg Discussion Paper No. 323, July 1999.

Abstract:

We develop a theoretical model with imperfect competition on goods and labor markets for the European Economic and Monetary Union. The distinctive feature of the model is a highly integrated goods market whereas labor markets are separated. The latter is due to differing institutional setups and a low degree of labor mobility across countries. Within this framework we analyze the medium-term consequences of country-specific labor market shocks on unemployment and real wages in all member states. We show that rising wage pressure in one country leads to adverse effects for all members of the EMU. We also demonstrate that the transmission of shocks depends on the institutional setup of the unemployment compensation system.