Labor Market Adjustment Mechanisms in the Monetary Union: A Europe-United States Comparison.

Summary The mechanisms of adjustment by the labor market are studied through two approaches. First, relative price flexibility is analyzed using a simplified multinational macroeconomic model estimated on the 14 European countries. This model is used to study the consequences of symmetric and asymmetric supply and demand shocks. These simulations show that wage and employment flexibility only allows for an incomplete and very slow rebalancing (beyond ten years). Labor mobility is then studied with a model of migration movements articulated with a price-wage-employment block applied to the American case on the four large American regions. The simulations confirm that the flexibility of prisons allows only limited adjustments in the face of supply or demand shocks. Labor mobility does play a role in rebalancing, but to a very limited extent.