Asymmetric labor market institutions in the EMU and the volatility of inflation and unemployment differentials By Mirko Abbritti and Andreas Mueller Discussion.

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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 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) URRWR Phillips curveSteeperFlatter

Question 1 Policy implication? Stimulate union wide RWR for flatter Phillips curve? URRWR Phillips curveSteeperFlatter

Analysis scheme Currency union: Home region + Foreign region Symmetric shock Asymmetric shock Symmetric labor market structure Case 1 Asymmetric labor market structure Case 2Case 3

Case 1: Asymmetric shock with symmetric labor market structure Finding: UR and RWR have different effects on inflation and unemployment differentials URRWR Volatility inflation differentials +0 Volatility unemployment differentials -+

Question 2 Policy implication? Stimulate union wide UR for lower unemployment differentials due to asymmetric shocks? URRWR Volatility inflation differentials +0 Volatility unemployment differentials -+

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 Remove all labor market asymmetries. Because they deteriorate adjustment to symmetric shocks. UR asymmetry RWR asymmetry Volatility inflation differentials +++ Volatility unemployment differentials +++

New dimension: Two types of labor market asymmetry ‘Complements’ HomeForeign UR+- RWR+- ‘Substitutes’ HomeForeign UR+- RWR-+ ‘Complements’ HomeForeign UR-+ RWR-+ ‘Substitutes’ HomeForeign UR-+ RWR+-

Case of (any kind of) shock with asymmetric labor market structure => ‘Substitutes’ enforce effects of labor market asymmetries, while ‘complements’ offset them ComplementsSubstitutes Volatility inflation differentials ++++ Volatility unemployment differentials ++++

Question 3 Policy implication? Remove labor market asymmetries only/especially when these are substitutes? ComplementsSubstitutes Volatility inflation differentials ++++ Volatility unemployment differentials ++++

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?