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The Impacts of Structural Changes in the Labor Market: a Comparative Statics Analysis Using Heterogeneous-agent Framework

  • Carlos Miguel Silva

    (Faculdade de Economia da Universidade do Porto and CEF.UP)

  • Ana Paula Ribeiro

    ()

    (Faculdade de Economia da Universidade do Porto and CEF.UP)

In this paper we aim at analyzing the impacts on welfare and wealth and consumption distribution across different labor market structural features. In particular, we pursue a steady-state analysis to assess the impacts of unit vacancy costs, unemployment replacement ratio or the job destruction rate, when they are changed in order to promote a given reduction in the unemployment rate. We combine a labor market search and matching framework with unions, based on Mortensen and Pissarides (1994) with a heterogeneous-agent framework close to Imrohoroglu (1989) in a closed economy model. Such approach enables the joint assessment of macroeconomic welfare and inequality together with implications derived from institutional changes in labor market. Moreover, the transition matrix between worker's states is endogenous, fully derived from labor market conditions. Using feasible calibration to the Euro Area, we conclude that different institutional changes to promote unemployment reduction have non-neutral and differentiated effects on welfare and inequality. While changing unit vacancy costs and job destruction can be ranked, changes in the unemployment benefit replacement ration involve a trade-off between gains in welfare and in consumption/income distribution.

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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series CEF.UP Working Papers with number 1104.

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Length: 25 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:por:cetedp:1104
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  1. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
  2. Eric J. Bartelsman & Pieter A. Gautier & Joris de Wind, 2011. "Employment Protection, Technology Choice, and Worker Allocation," DNB Working Papers 295, Netherlands Central Bank, Research Department.
  3. Krusell, Per & Mukoyama, Toshihiko & Sahin, Aysegul, 2009. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," CEPR Discussion Papers 7429, C.E.P.R. Discussion Papers.
  4. Christian BAYER & Klaus WALDE, 2010. "Matching and Saving in Continuous Time: Theory," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010013, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Campolmi, Alessia & Faia, Ester, 2011. "Labor market institutions and inflation volatility in the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 793-812, May.
  6. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  7. Enchuan Shao & Pedro Silos, 2007. "Uninsurable individual risk and the cyclical behavior of unemployment and vacancies," Working Paper 2007-05, Federal Reserve Bank of Atlanta.
  8. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  9. Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, 05.
  10. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
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