The potential effects of labour market duality for countries in a monetary union

Abstract

This article investigates whether the varying prevalence of temporary employment contracts across Economic and Monetary Union (EMU) countries can explain their different unemployment dynamics. Using a database of labour market institutions, dynamic panel regressions are carried out for 11 eurozone countries for 1995–2013. Labour market duality – i.e. the co-existence of permanent and temporary contracts – is found to have a robust and significant effect on unemployment dynamics: a high duality rate increases the response of unemployment to output shocks while decreasing its persistence. The authors suggest that introducing a “single contract” could improve stability at both eurozone and country level.