Why should Southern economies stay in the Euro Zone? The role of labor markets

Amélie Barbier-Gauchard (), Francesco De Palma and Giuseppe Diana

Economic Modelling, 2014, vol. 43, issue C, 201-208

Abstract: We assume a world of two countries in a fixed exchange rate system. These countries differ in the features of their labor markets. The home country is characterized by a dual labor market, with formal and informal sectors. In the foreign country, a nominal wage rigidity exists. In this context, the situation of the labor markets in each country is not optimal owing to a misallocation of workers between sectors in the domestic economy and unemployment in the foreign economy. We show that a devaluation of domestic currency implies a fall in production in each country and deterioration of labor markets in both countries.

Keywords: Efficiency wage; Dualism; Exchange rate; Devaluation; EMU (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:43:y:2014:i:c:p:201-208

DOI: 10.1016/j.econmod.2014.07.046

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