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 suc ceeded in inducing price convergence amongst its participants, but at the same time has increased the divergence between their rates of unem ployment, In this paper we attempt to measure the level of the ineffic iency imposed on the labour markets as a result of having different la bour market structures under one monetary policy, and then use these r esults to provide a new explanation for the secular rise in European u nemployment based on the degree of labour market heterogeneities and t he asymmetries in wage settings in each market. As a closer monetary u nion of its own regions, the UK is used as a comparison for the Europe -wide results.