On the Importance of the Dual Labour Market for a Country within a Monetary Union

The paper investigates whether differences in the popularity of fixed term contacts on the labour market can be a source of divergent dynamics of unemployment among European Monetary Union economies. For that purpose we construct a database of labor market institutions for a group of eleven euro area countries and years 1995-2013 to conduct a series of dynamic panel regressions. We find a robust and significant impact of duality on unemployment dynamics: high duality rate amplifies its responsiveness to output shocks and lowers its persistence. The heterogeneous unemployment developments, in turn, are a challenge for the conduct of common monetary policy. We conclude that improved stability at both the euro area and country level may be obtained by a coordinated shift to ‘single-contract' that closes the disproportion between temporary and regular contracts