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Adjustments in the European labour markets are a major source of economic resilience and integration. As such, they warrant in-depth understanding and close monitoring in the specific context of Eurozone and national fiscal policies.
This report begins with an executive summary (part A), then
goes on to review recent literature on adjustment to asymmetric shocks within a monetary union (part B) and to highlight the role of real adjustment (notably labour adjustment). In part C, we study the extent to which there has been an increase or a decrease in the convergence and speed of adjustment of regional and national labour markets of Member States after the EMU. We find no evidence of a
decline in either of those dimensions. In part D, we explore areas requiring policy intervention. For that we build an original methodology: we study how the dynamics of labour markets depend on various institutions. The methodology is adapted to national labour markets and regional labour
markets where in addition one can capture the effects on regional population and inter-regional mobility. We find a surprisingly strong role for the institutions in the housing market, somewhat stronger than other institutions, and check the robustness of this result. We then argue in part E that
removing obstacles to geographical mobility and simultaneously undertaking pro-competition reforms
in the goods market could be a beneficial mix, as these measures each reinforce the other’s positive effect. Wage flexibility, notably regional wage flexibility, would also ease the convergence of labour markets. But, in a realistic short run, this cannot be the only dimension of reform: it requires social consensus on redefining fundamental elements of the European Welfare States, which is a long-run target. We focus on other reforms that can be implemented in a shorter time horizon.
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