Is Small Really Beautiful? Explaining Different Unemployment Performances within the Euro-Zone

This article asks why unemployment performance in small countries in European Monetary Union has been superior to that in large EMU countries. Within a model of monopolistic competition, it is shown that a possible answer is a beggar the neighbour policy by the small countries. When dropping the real balance effect from a standard model of monopolistic competition, it is found that a monopoly trade union setting wages for a large economy cannot influence employment and output by changing nominal wages. A trade union in a small country which is in a monetary union with a large country, on the other hand, can increase output and employment by wage restraint.

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