| Over the last three decades, unemployment in Europe has been a major problem. It has increased steadily over time, although its pattern of movement has not been homogeneous across the different countries. Moreover, European unemployment is structural in nature. Decline in economic growth, increase in interest rates and technological progress has led to incomplete sectoral shifts or job relocation, resulting in a change in the underlying unemployment rate. With the introduction of a single currency and a common monetary policy in 1999 (formation of the European Monetary Union), the member countries were faced with a new challenge. Without being able to follow an independent monetary policy, and having restricted use of fiscal policy, the European economies were required to look for alternate measures to deal with adverse shocks, and to also reduce unemployment.;Using data collected from various sources, and parametric and semi-parametric estimation techniques, the current research attempts to analyze the impact of the European Monetary Union (EMU) on European unemployment, wage rigidity and labor market institutions. Results of individual country analysis indicate that EMU has had mixed impact on the wage rigidities of the member countries which may be attributed to the heterogeneity in the institutional characteristics and tax structures of these countries. However, both real and nominal wage rigidities decreased for the entire group of EMU member countries. Moreover, unemployment and labor costs decreased for most of the member countries post 1999. EMU has also been found to affect real wage pressure factors in such a way as to reduce real wage resistance, improve job search effectiveness, and hence, lower unemployment. This implies that participating countries must have followed labor market reform policies, and made adjustments in the absence of monetary and fiscal policies. This is a positive signal to the would-be members of the EMU.;Thus, the findings of this research strongly support our claim that with the formation of the EMU, member countries will have to follow labor market reform policies to deal with external shocks and unemployment issues in the absence of independent monetary policy and restricted use of fiscal policy. |
