Labor market institutions in a shopping economy

Modeling labor markets in a search and matching framework became a standard approach in DSGE studies. However, there is an expanding strand of literature arguing that similar frictions characterize the product market. When households are required to exert costly shopping effort in order to enjoy consumption, shifts in households preferences tend do have a larger impact on product and employment than in otherwise standard RBC model. We construct a general equilibrium model with frictions both in the labor and the product markets and confirm that in case of the US, preference shocks are the main driver of the business cycle. Moreover, we verify if presence of shopping frictions affects the relation between labor market institutions and unemployment, both in terms of its steady-state level and volatility. However, we find that most results are qualitatively in line with studies treating the product market as frictionless. Higher unemployment benefits and wage rigidity tend to increase variance of unemployment, while benefits also promote higher unemployment in the long run. Firing taxes contribute to lower level and volatility of unemployment. Surprisingly, while effects of recruitment cost on steady state allocation are comparable to the impact of firing cost, the former rises the volatility of unemployment in our simulations for the US.