nr 076 - The Synchronisation of European Labour Markets: An Analysis Using Aggregate Philips Curves

DNB Working Papers
Date 28 December 2005

This paper investigates the position of the Phillips curve in a single currency area, when the countries have different levels of unemployment. We will use the aggregation hypothesis to show that allowing for the dispersion of unemployment is essential to quantifying the level of inflation corresponding to any given unemployment rate. Next, we point out that the EMU countries have attained increasingly similar unemployment rates since the creation of the single market and the adoption of the single currency. This observed synchronisation in countries’ labour markets in the 1990s has reduced the effect of the aggregation hypothesis. This implies that the level of inflation is now lower for any given level of unemployment, which eases the choices of monetary policy makers. Keywords: aggregation hypothesis, Phillips curve, EMU, labour markets. JEL classifications: C52, E24, F15