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Institutions and Wage Formation in the New Europe

Edited by Gabriel Fagan, Francesco Paolo Mongelli and Julian Morgan

Institutions and Wage Formation in the New Europe addresses the role played by institutions in European wage formation with a focus on EMU and institutional change in labour markets.
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Chapter 8: Aggregation and euro area Phillips curves

Silvia Fabiani and Julian Morgan


Silvia Fabiani and Julian Morgan1 INTRODUCTION2 Since the start of Stage 3 of EMU, attention has increasingly been paid to euro area aggregate rather than national developments. This is true for a wide range of economic and financial information, reflecting the notion of the euro area as a single economic entity – ‘Euroland’. At the same time, while a single monetary policy has been adopted, it is recognized that many important differences in economic structures remain across countries. Nowhere is this more evident than in labour markets. Structural features relating to labour market institutions, the legislative framework and social security systems differ to a large degree across the euro area countries. Such differences raise issues about whether one should analyse labour market developments at the area-wide level or whether it is more appropriate to conduct analysis at the national level and aggregate the outcomes to the euro area level. There is a growing literature on aggregation issues which is summarized in Dedola et al. (2001). Much of the recent work has focused on the aggregation of money demand relationships (Fagan and Henry, 1998; Dedola et al., 2001) but some analysis has also been undertaken with respect to labour markets (Turner and Seghezza, 1999; OECD, 2000). The question that is often addressed by researchers is whether there is an aggregation bias that emerges when estimating relationships at an aggregate rather than national level. As discussed in Fagan and Henry (1998), an aggregation bias will emerge unless either the estimated parameters in such...

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