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Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model

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    This paper explores the influence of labor market institutions on aggregate fluctuations. It uses a dynamic, stochastic, general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market. It finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations. Increasing firing costs decreases the volatility of output, employment and job flows, due to the reduction of the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers. Hence, firms adjust to shocks mainly through prices, and inflation then becomes more volatile. Raising unemployment benefits has the reverse effect on aggregate fluctuations.

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    File URL: https://www.economicdynamics.org/meetpapers/2008/paper_370.pdf
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    Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 370.

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    Date of creation: 2008
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    Handle: RePEc:red:sed008:370
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
    Web page: http://www.EconomicDynamics.org/society.htm
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