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Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment

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  • Merkl, Christian

    ()
    (University of Erlangen-Nuremberg)

  • Schmitz, Tom

    ()
    (HEC Paris)

Abstract

This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility, which can also be rationalized by our theoretical model.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4924.

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Length: 29 pages
Date of creation: May 2010
Date of revision:
Publication status: published in: European Journal of Political Economy, 2011, 27 (1), 44-60
Handle: RePEc:iza:izadps:dp4924

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Keywords: unemployment benefits; labor turnover costs; output and inflation volatility; labor market institutions; unemployment; eurozone;

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References

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Citations

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Cited by:
  1. Campolmi, Alessia & Faia, Ester, 2011. "Labor market institutions and inflation volatility in the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 793-812, May.
  2. Schwarzmüller, Tim & Stähler, Nikolai, 2011. "Reforming the labor market and improving competitiveness: An analysis for Spain using FiMod," Discussion Paper Series 1: Economic Studies 2011,28, Deutsche Bundesbank, Research Centre.
  3. Gartner, Hermann & Merkl, Christian & Rothe, Thomas, 2009. "They Are Even Larger! More (on) Puzzling Labor Market Volatilities," IZA Discussion Papers 4403, Institute for the Study of Labor (IZA).
  4. 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.
  5. Abbritti, Mirko & Weber, Sebastian, 2010. "Labor market institutions and the business cycle Unemployment rigidities vs. real wage rigidities," Working Paper Series 1183, European Central Bank.
  6. Bernard Bartels, 2009. "The Monetary Transmission Mechanism in the Euro Area: A VAR-Analysis for Austria and Germany," Kiel Advanced Studies Working Papers, Kiel Institute for the World Economy 452, Kiel Institute for the World Economy.

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