Labor-Cost Effects on Relative Prices between Regions of a Monetary Union: Implications for the EMU

Three industrial organization (IO) models suggested by Dornbusch (1987) are here adapted to study the labor-cost effects on relative prices of tradable goods between the regions of a monetary union. The assumption of imperfect and segmented goods and labor markets makes the analysis best suited for a monetary union such as the present European EMU. We find that in this context the type and extent of the effects studied depend on the different degree of competition in the same industry of different countries, the different absolute or relative number of foreign and domestic firms in the market of each country, and the product substitutability. Very simple simulations show the potentiality of IO models in a dynamic framework.