Labor market institutions and aggregate fluctuations in a search and matching model

This paper explores the influence of labor market institutions on aggregate fluctuations. It uses a dynamic, stochastic, general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market. It finds that firing costs and unemploymen...

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Bibliographic Details
Published in:European economic review 2011-06, Vol.55 (5), p.644-658
Main Author: Zanetti, Francesco
Format: Article
Language:English
Subjects:
Aggregate analysis
Business cycles
Economic models
Keynesianism
Labor market
Labor market institutions
Labor market institutions Search and matching New Keynesian model Business cycles
Market
New Keynesian model
Search and matching
Studies
Unemployment
Unemployment benefits
Volatility
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Summary:This paper explores the influence of labor market institutions on aggregate fluctuations. It uses a dynamic, stochastic, general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market. It finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations. Increasing firing costs decreases the volatility of output, employment, and job flows due to the reduction in the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers. Hence, firms adjust to shocks mainly through prices, causing inflation to become more volatile. Raising unemployment benefits has the reverse effect on aggregate fluctuations.
ISSN:0014-2921
1873-572X
DOI:10.1016/j.euroecorev.2010.10.001