Advanced Search
MyIDEAS: Login to save this paper or follow this series

Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions

Contents:

Author Info

Abstract

We build a model that combines two types of labor market rigidities: real wage rigidities and labor market frictions. The model is used to analyze the implications of the interaction of different degrees and types of labor market rigidities for the business cycle by looking at three dimensions (i) the persistence of key economic variables; (ii) their volatility; (iii) the length, average duration and intensity of recessions and expansions. We find that real wage rigidities and labor market frictions, while often associated under the same category of "labor market rigidities" may have opposite effects on business cycle fluctuations. When the rigidity lies in the wage determination mechanism, real wages cannot fully adjust and shocks tend to be absorbed through changes in quantities. A higher degree of real wage rigidities thus amplifies the response of the real economy to shocks, shortens the duration of the business cycle but makes it more intense. When the rigidity lies in the labor market, it is more costly for firms to hire new workers and therefore unemployment does not vary as much, thus increasing inflation volatility and smoothening the response of the real economy to shocks. The cycle gets longer but less severe. Analyzing the interaction of institutions we show that these effects are reinforcing if institutions are substitutes - in the sense that countries with high labor market frictions tend to have low real wage rigidities and vice versa - while they are offsetting if institutions are complements. The findings from the model are supported when compared to the data of a range of OECD countries.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP01-2008.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 01-2008.

as in new window
Length: 50
Date of creation: Jan 2008
Date of revision: Jan 2008
Handle: RePEc:gii:giihei:heidwp01-2008

Contact details of provider:
Postal: P.O. Box 36, 1211 Geneva 21
Phone: ++41 22 731 17 30
Fax: ++41 22 738 43 06
Email:
Web page: http://www.graduateinstitute.ch/economics
More information through EDIRC

Related research

Keywords: monetary policy; labor market search; real wage rigidity; inflation volatility; labour market interactions;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Jean-Pierre Danthine & André Kurmann, 2003. "Fair Wages in a New Keynesian Model of the Business Cycle," Cahiers de recherche 0320, CIRPEE.
  2. Trigari, Antonella, 2004. "Equilibrium unemployment, job flows and inflation dynamics," Working Paper Series 0304, European Central Bank.
  3. Antonella Trigari, 2004. "Labour Market Search, Wage Bargaining and Inflation Dynamics," Working Papers 268, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Carlos Robalo Marques, 2005. "Inflation persistence: facts or artefacts?," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  5. Campolmi, Alessia & Faia, Ester, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 0619, European Central Bank.
  6. Benigno, Pierpaolo, 2001. "Optimal Monetary Policy in a Currency Area," CEPR Discussion Papers 2755, C.E.P.R. Discussion Papers.
  7. Carlos Thomas, 2006. "Search and Matching Frictions and Optimal Monetary Policy," CEP Discussion Papers dp0743, Centre for Economic Performance, LSE.
  8. Don Harding & Adrian Pagan, 1999. "Dissecting the Cycle," Melbourne Institute Working Paper Series wp1999n13, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  9. Alexopoulos, Michelle, 2004. "Unemployment and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(2), pages 277-298, March.
  10. Christoffel, Kai & Linzert, Tobias, 2006. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Discussion Paper Series 1: Economic Studies 2006,11, Deutsche Bundesbank, Research Centre.
  11. Giuseppe Bertola & Francine Blau & Lawrence Kahn, 2007. "Labor market institutions and demographic employment patterns," Journal of Population Economics, Springer, vol. 20(4), pages 833-867, October.
  12. Domenico Giannone & Lucrezia Reichlin, 2005. "Trends and cycles in the Euro Area: how much heterogeneity and should we worry about it?," Macroeconomics, EconWPA 0511016, EconWPA.
  13. Michael Artis & Massimiliano Marcellino & Tommaso Proietti, 2003. "Dating the Euro Area Business Cycle," Working Papers 237, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  14. Christopher Bowdler & Luca Nunziata, 2004. "Labour Markets Institutions and Inflation Performance: Evidence from OECD panel data," Money Macro and Finance (MMF) Research Group Conference 2004, Money Macro and Finance Research Group 29, Money Macro and Finance Research Group.
  15. Thomas Lubik & Michael Krause, 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Economics Working Paper Archive 504, The Johns Hopkins University,Department of Economics.
  16. Mirko Abbritti, 2007. "A "Simple" Currency Union Model with Labor Market Frictions, Real Wage Rigidities and Equilibrium Unemployment," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 09-2007, Economics Section, The Graduate Institute of International Studies.
  17. Federico Ravenna & Carl E. Walsh, 2007. "Vacancies, Unemployment, and the Phillips Curve," Kiel Working Papers 1362, Kiel Institute for the World Economy.
  18. Mirko Abbritti & Andreas Mueller, 2007. "Asymmetric Labor Market Institutions in the EMU: Positive and Normative Implications," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 02-2009, Economics Section, The Graduate Institute of International Studies, revised Apr 2009.
  19. Alfonso Arpaia & Gilles Mourre, 2005. "Labour Market Institutions and Labour Market Performance: A Survey of the Literature," Labor and Demography, EconWPA 0512011, EconWPA.
  20. Harding, Don & Pagan, Adrian, 2006. "Synchronization of cycles," Journal of Econometrics, Elsevier, Elsevier, vol. 132(1), pages 59-79, May.
  21. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(462), pages C1-33, March.
  22. Filippo Altissimo & Pierpaolo Benigno & Diego Rodriguez Palenzuela, 2005. "Long-Run Determinants of Inflation Differentials in a Monetary Union," NBER Working Papers 11473, National Bureau of Economic Research, Inc.
  23. Michelle Baddeley & Ron Martin & Peter Tyler, 2000. "Regional Wage Rigidity: The European Union and United States Compared," Journal of Regional Science, Wiley Blackwell, Wiley Blackwell, vol. 40(1), pages 115-141.
  24. Domenico Giannone & Lucrezia Reichlin, 2004. "Euro area and US recessions: 1970-2003," ULB Institutional Repository 2013/6405, ULB -- Universite Libre de Bruxelles.
  25. Angeloni Ignazio & Ehrmann Michael, 2007. "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 7(1), pages 1-36, August.
  26. Moyen, Stephane & Sahuc, Jean-Guillaume, 2005. "Incorporating labour market frictions into an optimising-based monetary policy model," Economic Modelling, Elsevier, vol. 22(1), pages 159-186, January.
  27. Alan Ahearne & Jean Pisani-Ferry, 2006. "The Euro: only for the agile," Policy Briefs 42, Bruegel.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Merkl, Christian & Schmitz, Tom, 2010. "Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment," IZA Discussion Papers 4924, Institute for the Study of Labor (IZA).
  2. Duarte, Rita & Marques, Carlos Robalo, 2009. "The dynamic effects of shocks to wages and prices in the United States and the euro area," Working Paper Series 1067, European Central Bank.
  3. Knell, Markus, 2010. "Nominal and real wage rigidities. In theory and in Europe," Working Paper Series 1180, European Central Bank.
  4. Albertini, Julien & Fairise, Xavier, 2013. "Search frictions, real wage rigidities and the optimal design of unemployment insurance," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(9), pages 1796-1813.
  5. Julien Albertini & Xavier Fairise, 2009. "Search frictions, real wage rigidities and theoptimal design of unemployment insurance: a study in a DSGE framework," Documents de recherche, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne 09-03, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  6. Christian Merkl, 2009. "The Inflation-Output Tradeoff: Which Type of Labor Market Rigidity Is to Be Blamed?," Kiel Working Papers 1495, Kiel Institute for the World Economy.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:gii:giihei:heidwp01-2008. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Johannes Eugster).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.