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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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  • 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.
  • Handle: RePEc:ecb:ecbwps:20101183

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    References listed on IDEAS

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    Cited by:

    1. Gnocchi, Stefano & Lagerborg, Andresa & Pappa, Evi, 2015. "Do labor market institutions matter for business cycles?," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 299-317.
    2. Georgiadis, Georgios, 2016. "Determinants of global spillovers from US monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 41-61.
    3. Mirko Abbritti & Andreas I. Mueller, 2013. "Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1165-1186, September.
    4. Nicola Acocella & Laura Bisio & Giovanni Di Bartolomeo & Alessandra Pelloni, "undated". "Labor market imperfections, real wage rigidities and financial shocks," Working Papers 80/11, Sapienza University of Rome, Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF.
    5. Gubler, Matthias & Hertweck, Matthias S., 2013. "Commodity price shocks and the business cycle: Structural evidence for the U.S," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 324-352.
    6. Gamberoni, Elisa & Von Uexkull, Erik & Weber, Sebastian, 2010. "The Roles of Openness and Labor Market Institutions for Employment Dynamics during Economic Crises," World Bank - Economic Premise, The World Bank, issue 29, pages 1-5, August.
    7. Hjortsoe, Ida & Weale, Martin & Wieladek, Tomasz, 2016. "Monetary Policy and the Current Account: Theory and Evidence," CEPR Discussion Papers 11204, C.E.P.R. Discussion Papers.
    8. Ester Faia & Wolfgang Lechthaler & Christian Merkl, 2014. "Labor Selection, Turnover Costs, and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(1), pages 115-144, February.
    9. Georgiadis, Georgios, 2014. "Towards an explanation of cross-country asymmetries in monetary transmission," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 66-84.
    10. Jose Ignacio García Pérez & Victoria Osuna, 2011. "The effects of introducing a single open-ended contract in the Spanish labour market," Working Papers 11.07, Universidad Pablo de Olavide, Department of Economics.
    11. Athina Zervoyianni & Athanasios Anastasiou & Andreas Anastasiou, 2014. "Does central bank independence really matter? Re-assessing the role of the independence of monetary policy-makers in macroeconomic outcomes," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 8(4), pages 427-473.
    12. Faccini, Renato & Rosazza Bondibene, Chiara, 2012. "Labour market institutions and unemployment volatility: evidence from OECD countries," Bank of England working papers 461, Bank of England.
    13. Christoph S. Weber, 2017. "The Unemployment Effect of Central Bank Transparency," Working Papers 172, Bavarian Graduate Program in Economics (BGPE).
    14. Georgiadis, Georgios, 2015. "Examining asymmetries in the transmission of monetary policy in the euro area: Evidence from a mixed cross-section global VAR model," European Economic Review, Elsevier, vol. 75(C), pages 195-215.
    15. Fabrizio Mattesini & Lorenza Rossi, 2012. "Monetary Policy and Automatic Stabilizers: The Role of Progressive Taxation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 825-862, August.
    16. Georgiadis, Georgios, 2012. "The panel conditionally homogenous vectorautoregressive model," MPRA Paper 37755, University Library of Munich, Germany.
    17. Lochner, Benjamin, 2014. "Employment protection in dual labor markets: Any amplification of macroeconomic shocks?," FAU Discussion Papers in Economics 14/2014, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    18. Wataru Hirata, 2012. "Reconciling the Relevance of Labor Market Institutions in Search and Matching Models with International Evidence," Bank of Japan Working Paper Series 12-E-2, Bank of Japan.
    19. repec:ilo:ilowps:461897 is not listed on IDEAS

    More about this item


    business cycle; Labor Market Search; monetary policy; Real Wage Rigidity; Unemployment;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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