Microeconomic perspectives on aggregate labor markets

The chapter discusses the role played by labor market institutions in shaping the dynamics of wages, employment, and unemployment across European countries and the United States. The first part of the chapter uses simple, but formal models to show that the greater job security granted to European employees should smooth out aggregate employment dynamics but, for given wage processes, cannot be expected to reduce aggregate employment. Slow employment creation and high, persistent unemployment are associated with high and increasing wages in cross-country evidence, and the chapter surveys recent work aimed at explaining such differential wage dynamics via insider-outsider interactions and wage bargaining institutions. The following section discusses the extent to which job security provisions and wage-setting practices can rationalize evidence on cross-sectional job turnover and wage inequality, and reviews the implications of such phenomena for aggregate labor markets' productivity. The chapter is concluded by a discussion of recent perspectives on the possible determinants (rather than the effects) of institutional labor market differences across industrialized countries and over time.