Labour market reform in a monetary union

This paper examines the effect of monopolistic labour unions' behaviour on governments' incentives to undertake labour market reform, inside and outside a symmetric and an asymmetric monetary union (MU). Incentives for reform are increased inside the MU when governments and labour unions move simultaneously in the first stage of the policy game, which is attributed to the strategic complementarity of labour market institutions. Inside the MU there is a possibility of a 'race to the bottom' deregulation. This can be avoided by cooperation of the two governments, only in the case of a symmetric MU and, in particular, when unions are powerful in the wage bargaining process.