Regional inequalities and the business cycle: An explanation of the rise in European unemployment

The introduction of a system of fixed exchange rates in Europe has succeeded in inducing price convergence amongst its participants, but at the same time has increased the divergence between their rates of unemployment, In this paper we attempt to measure the level of the inefficiency imposed on the labour markets as a result of having different labour market structures under one monetary policy, and then use these results to provide a new explanation for the secular rise in European unemployment based on the degree of labour market heterogeneities and the asymmetries in wage settings in each market. As a closer monetary union of its own regions, the UK is used as a comparison for the Europe-wide results.