Effect of European monetary union membership on labor productivity: Using the synthetic control method

In this paper we focus on labor productivity to provide a measure of economic growth and living standards in a country. The European Monetary Union (EMU), which indicates deeper economic integration in Europe, was established in 1999 and currently consists of 19 members. The outcomes of economic integration are mixed with economic stability, higher growth, and more employment for member countries, yet losing independence in monetary and fiscal policies. Therefore, there is an increasing interest in academia and policy makers to understand gains or losses after joining the EMU from various perspectives.

This paper assesses the benefits and costs of Eurozone membership by exploring the labor productivity dynamics of the Eurozone member countries. Labor productivity is defined as real gross domestic product (GDP) per hour worked and measures the efficiency of labor input combined with other factors of production in the production process. Labor productivity offers a dynamic measure of economic growth, competitiveness, and living standards within an economy. It is also useful in cross-country comparisons to explain persistent disparities of economic growth. Using data on 14 Eurozone countries in 1970-2014 and the Synthetic Control Method (SCM), we find that the outcomes of joining the Eurozone are mixed among the member countries. Austria, Finland, France, Germany, Ireland, the Netherlands, Spain and Portugal gain from the Eurozone membership; however, Spain and Portugal went through a short adjustment period before exhibiting higher labor productivity. On the other hand, Belgium, Cyprus, Greece, Italy, Luxembourg, and Malta experienced lower labor productivity ex-post adopting Euro.