Document de Travail de la DG Trésor n° 2007/06 - Labor market adjustment dynamics and labor mobility within the euro area
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In order to increase the resilience of euro area Member States to asymmetric shocks, both national policies and real adjustment mechanisms, such as relative competitiveness adjustments or the mobility of capital and labor, are crucial. Two major contributions from the 1990s showed that labor mobility was lower in Europe in response to asymmetric shocks than in the United States. However, since the creation of the euro area, dynamic adjustment mechanisms may have improved. We analyze adjustment mechanisms to national asymmetric shocks within the euro area between 1973 and 2005. Comparisons with the United States’ labor market dynamics suggest that labor mobility in response to asymmetric labor demand shocks is lower in the euro area than in the United States. Most of the shocks’ effects are instead absorbed by changes in the participation rate on labor markets.
However, estimates based on a shorter and more recent period (1990-2005) indicate that the reactions of labor markets to asymmetric labor demand shocks in the euro area have become closer to those observed in the United States. The contribution of labor participation to the adjustment process appears to have diminished, and relative movements of labor forces between Member States seem to have become a more efficient adjustment mechanism.