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Labor selection, turnover costs and optimal monetary policy

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  • Faia, Ester
  • Lechthaler, Wolfgang
  • Merkl, Christian

Abstract

We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms' counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation.

Suggested Citation

  • Faia, Ester & Lechthaler, Wolfgang & Merkl, Christian, 2012. "Labor selection, turnover costs and optimal monetary policy," Kiel Working Papers 1534, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkwp:1534
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    Citations

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    Cited by:

    1. Anthony Diercks, 2016. "The Equity Premium, Long-Run Risk, and Optimal Monetary Policy," 2016 Meeting Papers 207, Society for Economic Dynamics.
    2. Sanjay K. Chugh & Christian Merkl, 2016. "Efficiency And Labor Market Dynamics In A Model Of Labor Selection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 1371-1404, November.
    3. Lechthaler, Wolfgang & Tesfaselassie, Mewael, 2015. "Trend growth, unemployment and optimal monetary policy," Kiel Working Papers 2003, Kiel Institute for the World Economy (IfW).
    4. Ismail Baydur, 2017. "Worker Selection, Hiring, and Vacancies," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 88-127, January.
    5. repec:eee:labeco:v:50:y:2018:i:c:p:87-91 is not listed on IDEAS
    6. Anna Kosior & Michał Rubaszek & Kamil Wierus, 2015. "On the importance of the dual labour market for a country within a monetary union," NBP Working Papers 207, Narodowy Bank Polski, Economic Research Department.
    7. Sanjay K. Chugh & Wolfgang Lechthalerz & Christian Merkl, 2015. "Optimal Fiscal Policy with Labor Selection," Boston College Working Papers in Economics 884, Boston College Department of Economics.
    8. Diercks, Anthony M., 2015. "The Equity Premium, Long-Run Risk, & Optimal Monetary Policy," Finance and Economics Discussion Series 2015-87, Board of Governors of the Federal Reserve System (U.S.).
    9. Kohlbrecher, Britta, 2016. "Optimal Monetary Policy under Rigid Wages and Decreasing Returns," Annual Conference 2016 (Augsburg): Demographic Change 145867, Verein für Socialpolitik / German Economic Association.
    10. Barbara Annicchiarico & Alessandra Pelloni, 2016. "Innovation, Growth and Optimal Monetary Policy," CEIS Research Paper 376, Tor Vergata University, CEIS, revised 01 Apr 2016.
    11. repec:iza:izawol:journl:y:2017:n:383 is not listed on IDEAS

    More about this item

    Keywords

    optimal monetary policy; hiring and firing costs; labor market frictions; policy trade-off;

    JEL classification:

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

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