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Macroeconomic Policy Lessons of Labor Market Frictions

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  • Yashiv, Eran

    (Tel Aviv University)

Abstract

The paper explores the consequences of macroeconomic policy for labor market outcomes in the presence of frictions. It shows how policy may be useful in overriding frictions, as well as how it might generate adverse outcomes. The analysis looks at the main tools of macroeconomic policy and pertains to both the non-stochastic steady state and to business cycle fluctuations. A partial-equilibrium, empirically-grounded model is used to simulate policy effects. It relies on a reduced-form VAR of the actual data to specify the stochastic behavior of exogenous variables, precluding the possibility that labor market results will be affected by misspecifications in other parts of a more general macroeconomic model. The key results are that policy has effects on the stochastic behavior of key variables - measures that reduce unemployment also reduce its persistence and increase the volatility of vacancies. Hiring subsidies and unemployment benefits have substantial effects on labor market outcomes, while employment subsidies or wage tax reductions are not very effective policy instruments.

Suggested Citation

  • Yashiv, Eran, 2002. "Macroeconomic Policy Lessons of Labor Market Frictions," IZA Discussion Papers 446, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp446
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    2. Ken-ichi Hashimoto & Ryonghun Im, 2019. "Asset bubbles, labour market frictions and R&D-based growth," Canadian Journal of Economics, Canadian Economics Association, vol. 52(2), pages 822-846, May.
    3. Yashiv, Eran, 2006. "Evaluating the performance of the search and matching model," European Economic Review, Elsevier, vol. 50(4), pages 909-936, May.
    4. Xie, Yi & Jiang, Jinwen & Wang, Dong, 2024. "Green finance policy and labor demand: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    5. Launov, Andrey & Wälde, Klaus, 2016. "The employment effect of reforming a public employment agency," European Economic Review, Elsevier, vol. 84(C), pages 140-164.
    6. Christoffel, Kai & Linzert, Tobias, 2005. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Working Paper Series 556, European Central Bank.
    7. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.
    8. Launov, Andrey & Wälde, Klaus, 2013. "Thumbscrews for Agencies or for Individuals? How to Reduce Unemployment," IZA Discussion Papers 7659, IZA Network @ LISER.
    9. Eran Yashiv, 2005. "Forward-Looking Hiring Behavior and the Dynamics of the Aggregate Labor Market," 2005 Meeting Papers 360, Society for Economic Dynamics.
    10. Cook, David & Xu, Juanyi, 2015. "Eurosclerosis and international business cycles," Journal of International Economics, Elsevier, vol. 95(1), pages 54-67.
    11. Zanetti, Francesco, 2011. "Labor market institutions and aggregate fluctuations in a search and matching model," European Economic Review, Elsevier, vol. 55(5), pages 644-658, June.
    12. Pusateri, Nic, 2023. "Human capital heterogeneity of the unemployed and jobless recoveries," Journal of Macroeconomics, Elsevier, vol. 76(C).
    13. Sanna‐Mari Hynninen & Aki Kangasharju & Jaakko Pehkonen, 2009. "Matching Inefficiencies, Regional Disparities, and Unemployment," LABOUR, CEIS, vol. 23(3), pages 481-506, September.
    14. Thomas, Carlos & Zanetti, Francesco, 2009. "Labor market reform and price stability: An application to the Euro Area," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 885-899, September.
    15. Launov, Andrey & Wälde, Klaus, 2014. "Thumbscrews for Agencies or Individuals? How to reduce unemployment," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100558, Verein für Socialpolitik / German Economic Association.
    16. Matteo Cacciatore & Giuseppe Fiori, 2016. "The Macroeconomic Effects of Goods and Labor Marlet Deregulation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 1-24, April.
    17. Bank of England, 2008. "Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model," 2008 Meeting Papers 370, Society for Economic Dynamics.
    18. Batyra, Anna & Sneessens, Henri R., 2010. "Selective reductions in labor taxation: Labor market adjustments and macroeconomic performance," Journal of Policy Modeling, Elsevier, vol. 32(4), pages 531-543, July.

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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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