Skip to main content Accessibility help
Hostname: page-component-568f69f84b-8fhp6 Total loading time: 0.215 Render date: 2021-09-17T02:13:37.850Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": true, "newCiteModal": false, "newCitedByModal": true, "newEcommerce": true, "newUsageEvents": true }


Published online by Cambridge University Press:  16 September 2011

Céline Poilly
Université Catholique de Louvain
Jean-Guillaume Sahuc*
EDHEC Business School
Address correspondence to: Jean-Guillaume Sahuc, EDHEC Business School, 24 avenue Gustave Delory, 59057 Roubaix, France; e-mail:


To identify the labor market reforms that offer the highest payoff, we develop a medium-scale two-country model representing a currency union featuring real and nominal rigidities and heterogeneous labor market frictions. A labor market reform is modeled as a permanent structural change in the labor market institutions. We find that changes in the domestic labor market can have drastic welfare implications for both countries. Welfare improvements are observed when a worker (a firm) is more likely to find a job (a worker) or when jobs are less likely to be destroyed. In addition, labor market heterogeneity has sizeable effects on the level of welfare gains. The more flexible the foreign labor market, the higher its welfare. Finally, we show that (i) the way the monetary authorities conduct their policy has negligible welfare effects and (ii) matching frictions can offset the negative effect of price rigidities in the economy.

Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Abbritti, Mirko and Mueller, Andreas (2010) Asymmetric Labor Market Institutions in the EMU: Positive and Normative Implications. HEI working paper 02-2009 (revised January 2010), The Graduate Institute of International Studies.Google Scholar
Andolfatto, David (1996) Business cycles and labour market search. American Economic Review 86, 112132.Google Scholar
Blanchard, Olivier and Galí, Jordi (2010) Labor market frictions and monetary policy: A New Keynesian model with unemployment. American Economic Journal: Macroeconomics 2, 130.Google Scholar
Bodart, Vincent, de Walque, Grégory, Pierrard, Olivier, Sneessens, Henri, and Wouters, Rafael (2006) Nominal Wage Rigidities in a New Keynesian Model with Frictional Unemployment. Working paper 97, National Bank of Belgium.Google Scholar
Calvo, Guillermo (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383398.CrossRefGoogle Scholar
Campolmi, Alessia and Faia, Ester (2011) Labor market institutions and inflation volatility in the euro area. Journal of Economic Dynamics and Control 35, 793812.CrossRefGoogle Scholar
Chari, Varadarajan V., Kehoe, Patrick J., and McGrattan, Ellen (2002) Can sticky price models generate volatile and persistent real exchange rates? Review of Economic Studies 69, 533563.CrossRefGoogle Scholar
Chéron, Arnaud and Langot, François (2004) Labor market search and real business cycles: Reconciling nash bargaining with real wage dynamics. Review of Economic Dynamics 7, 476493.CrossRefGoogle Scholar
Christiano, Lawrence, Eichenbaum, Martin, and Evans, Charles (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 145.CrossRefGoogle Scholar
Christoffel, Kai, Kuester, Keith, and Linzert, Tobias (2009) The role of labor markets for euro area monetary policy. European Economic Review 53, 908936.CrossRefGoogle Scholar
Christoffel, Kai and Linzert, Tobias (in press) The role of real wage rigidity and labor market rigidities for inflation persistence. Journal of Money, Credit and Banking.Google Scholar
Dao, Mai (2008) International Spillover of Labor Market Reforms. Working paper 08/113, International Monetary Fund.Google Scholar
Dellas, Harris and George, S. Tavlas (2005) Wage rigidity and monetary union. Economic Journal 115, 907927.CrossRefGoogle Scholar
ECB (European Central Bank) (2002). Labor Market Mismatches in Euro Area Countries. Frankfurt An Main, Germany: European Central Bank.Google Scholar
Fagan, Gabriel, Henry, Jérôme, and Mestre, Ricardo (2005) An area-wide model (AWM) for the euro area. Economic Modelling 22, 3959.CrossRefGoogle Scholar
Faia, Ester (2008) Optimal monetary policy rules with labor market frictions. Journal of Economic Dynamics and Control 32, 13571720.CrossRefGoogle Scholar
Faia, Ester (2009) Ramsey monetary policy with labour market frictions. Journal of Monetary Economics 56, 570581.CrossRefGoogle Scholar
Fonseca, Raquel, Patureau, Lise, and Sopraseuth, Thepthida (2009) Divergence in labor market institutions and international business cycles. Annales d'Economie et de Statistique 95–96, 279–314.Google Scholar
Gertler, Mark L. and Trigari, Antonella (2009) Unemployment fluctuations with staggered Nash wage bargaining. Journal of Political Economy 117, 3886.CrossRefGoogle Scholar
Greenwood, Jeremy, Hercowitz, Zvi, and Huffman, Gregory W. (1988) Investment, capacity utilization and the business cycle. American Economic Review 78, 402417.Google Scholar
Guichard, Stéphanie and Laffargue, Jean-Pierre (2000) The Wage Curve: The Lessons of an Estimation over a Panel of Countries. Working paper 2000-21, CEPII.Google Scholar
Hall, Robert (2005) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95, 5065.CrossRefGoogle Scholar
Hayashi, Fumio (1982) Tobin's marginal q and average q: A neoclassical interpretation. Econometrica 50, 213224.CrossRefGoogle Scholar
Hosios, Arthur J. (1990) On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57, 279298.CrossRefGoogle Scholar
Hughes, Hallett, , Andrew and Viegi, Nicola (2003) Labor market reform and effectiveness of monetary policy in EMU. Journal of Economic Integration 18, 726749.Google Scholar
Krause, Michael and Lubik, Thomas (2007a) On-the-Job Search and the Cyclical Dynamics of the Labor Market. Working paper 779, European Central Bank.Google Scholar
Krause, Michael and Lubik, Thomas (2007b) The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions. Journal of Monetary Economics 54, 706727.CrossRefGoogle Scholar
Lucas, Robert (1987) Models in Business Cycles. New York: Basil Blackwell.Google Scholar
Merz, Monikca (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36, 269300.CrossRefGoogle Scholar
Moyen, Stéphane and Sahuc, Jean-Guillaume (2005) Incorporating labor market frictions into an optimising-based monetary policy model. Economic Modelling 22, 159186.CrossRefGoogle Scholar
Nickell, Stephen J., Nunziata, Luca, and Ochel, Wolfgang (2005) Unemployment in the OECD since the 1960s. What do we know? Economic Journal 115, 127.CrossRefGoogle Scholar
OECD (2006) OECD Employment Outlook.Google Scholar
Petrongolo, Barbara and Pissarides, Christopher A. (2001) Looking into the black box: A survey of the matching function. Journal of Economic Literature 38, 390431.CrossRefGoogle Scholar
Smets, Frank and Wouters, Rafael (2003) An estimated dynamic stochastic general equilibrium model of the euro area. Journal of the European Economic Association 1, 11231175.CrossRefGoogle Scholar
Thomas, Carlos (2008) Search and matching frictions and optimal monetary policy. Journal of Monetary Economics 55, 936956.CrossRefGoogle Scholar
Trigari, Antonella (2009) Equilibrium unemployment, job flows and inflation dynamics. Journal of Money, Credit and Banking 41, 133.CrossRefGoogle Scholar
Walsh, Carl (2005) Labor market search, sticky prices, and interest rate policies. Review of Economic Dynamics 8, 829849.CrossRefGoogle Scholar
Cited by

Send article to Kindle

To send this article to your Kindle, first ensure is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the or variations. ‘’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

Available formats

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

Available formats

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *