Labor market reform and price stability: an application to the Euro Area

Carlos Thomas and Francesco Zanetti

No 818, Working Papers from Banco de España

Abstract: This paper studies the effect of labor market reform, in the form of reductions in firing costs and unemployment benefits, on inflation volatility. With this purpose, we build a New Keynesian model with search and matching frictions in the labor market, and estimate it using Euro Area data. Qualitatively, changes in labor market policies alter the volatility of inflation in response to shocks, by affecting the volatility of the three components of real marginal costs (hiring costs, firing costs and wage costs). Quantitatively, we find however that neither policy is likely to have an important effect on inflation volatility, due to the small impact of changes in the volatility of the labor market on inflation dynamics.

Keywords: Labor market policies; Search and matching frictions; New Keynesian model (search for similar items in EconPapers)
JEL-codes: E31 E32 J64 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2008-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-lab and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Labor market reform and price stability: An application to the Euro Area (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0818

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