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

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  • Bank of England

Abstract

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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  • Bank of England, 2008. "Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model," 2008 Meeting Papers 370, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:370
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