Working Paper BETA #2013-09

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Title : Why could Northern labor market flexibility save the eurozone ?

Author(s) : Amélie Barbier-Gauchard, Francesco De Palma, Giuseppe Diana

Abstract : We consider a heterogenous labor market in a two-country monetary union. The domestic economy is characterized by a dual labor market with formal and informal sectors as observed in most Southern EMU economies. Among formal workers, wage-levels result from eciency considerations. In the foreign economy, with reference to Northern EMU economies, we assume another type of wage rigidity explained by the presence of unions. More precisely, only wages are bargained between rms and employees as in the right-to-manage model. These rigidities lead to inecient allocations of workers in each country: a misallocation of workers among sectors in the domestic country and unemployment in the foreign one. In this context, the labor market exibilization may appear as a relevant option for improving the situation of activity and employment in the monetary union. This is the reason why we investigate the overall e ects of a decrease in trade union bargaining power in the foreign (Northern) economy. We show that, at the new equilibrium, a lower bargaining power in the foreign economy leads to a decrease in all prices and the e ects are positive overall. In the foreign economy, the equilibrium level of production is higher, unemployment decreases and wages are lower. In the domestic one, the production also increases, the labor market bene ts from a better allocation of workers between formal and informal sectors, and all wages are higher.

Key-words : efficiency wage, dualism, EMU, trade unions, bargaining.

JEL Classification : E60, F16, F41, J31