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Non-Walrasian Labor Market and the European Business Cycle

  • Francesco Zanetti

    ()

    (Boston College)

This paper investigates to what extent a New Keynesian, monetary model with the addition of a microfounded, non-Walrasian labor market based on union bargaining is able to replicate key aspects of the European business cycle. The presence of a representative union permits to explain two features of the cycle. First, it generates an endogenous mechanism which produces persistent responses of the economy to both supply and demand shocks. Second, labor unionization causes a lower elasticity of marginal costs to output. This leads to lower inflation volatility. The model can replicate the negative correlation between productivity shocks and employment in the data. Model simulations show the superiority of the unionized framework to reproduce European business cycle statistics relative to a model with competitive labor market.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 574.

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Date of creation: 01 Apr 2003
Date of revision: 20 May 2004
Handle: RePEc:boc:bocoec:574
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