Summary of WP/94/158: “The Response of Wages and Labor Supply Movements to Employment Shocks Across Europe and the United States”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

This paper compares the degree of labor market flexibility across geographical regions in the United Kingdom and the United States and across four European countries (France, Germany, Italy, and the United Kingdom). This comparison is motivated by the prospect of European Economic and Monetary Union, within which the ability to vary bilateral exchange rates will be eliminated. This will necessitate a greater reliance on other forms of adjustment for countries within the Union.

The paper uses a multivariate VAR framework to assess the degree to which relative regional and national wages and labor forces adjust to employment shocks. The paper finds that the responsiveness of wages to employment shocks in the United States and in Europe is minimal but that there are large differences in the response of the labor forces in both areas. There is a high degree of interregional migration in the United States, so that when a region experiences a large reduction in employment, a sizable fraction of the labor force moves to surrounding regions. This movement is sufficient to prevent persistent unemployment differences across U.S. regions. In Europe, the German and French economy-wide labor forces and the British regional labor forces adjust to a limited degree to employment shocks, but the magnitude of the adjustment is insufficient to prevent the appearance of persistent unemployment rate differences. There is very little adjustment of the British and Italian economy-wide labor forces to employment shocks.

The paper concludes that Europe must promote measures to stimulate interregional and international migration to facilitate its adoption of a common currency.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund