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Assessing labor market frictions in a small open economy

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  • Sheen, Jeffrey
  • Wang, Ben Zhe

Abstract

We estimate small open economy models with involuntary unemployment using Australian data from 1993 to 2013, assessing whether nominal or real wage rigidity and hiring costs matter. Nominal wage rigidity with hiring costs (accounting for 1.58% of GDP) are strongly preferred. Using the preferred model, technology shocks explain most short-run unemployment and long run real wage variance. External shocks have important lasting effects on inflation and consumption, and on long-run investment and interest rates, but little on the labor market. Out-of-sample conditional forecasts perform well but cannot predict the confidence effects of the crisis in 2008.

Suggested Citation

  • Sheen, Jeffrey & Wang, Ben Zhe, 2016. "Assessing labor market frictions in a small open economy," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 231-251.
    • Handle: RePEc:eee:jmacro:v:48:y:2016:i:c:p:231-251
    DOI: 10.1016/j.jmacro.2016.02.006
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    More about this item

    Keywords

    DSGE; Hiring costs; Wage rigidities; Bayesian estimation; Small open economy;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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