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Labor market institutions and the business cycle Unemployment rigidities vs. real wage rigidities

  • Abbritti, Mirko
  • Weber, Sebastian

This paper investigates the importance of labor market institutions for inflation and unemployment dynamics. Using the New Keynesian framework we argue that labor market institutions should be divided into those institutions that cause Unemployment Rigidities (UR) and those that cause Real Wage Rigidities (RWR). The two types of institutions have opposite effects and their interaction is crucial for the dynamics of inflation and unemployment. We estimate a panel VAR with deterministically varying coefficients and find that there is a profound difference in the responses of unemployment and inflation to shocks under different constellations of the labor market. JEL Classification: E32, E24, E52

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Paper provided by European Central Bank in its series Working Paper Series with number 1183.

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Date of creation: Apr 2010
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Handle: RePEc:ecb:ecbwps:20101183
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