The Calmfors-Driffill Hypothesis with Labour Market Frictions and Regulated Goods Markets

José Ramón García and Valeri Sorolla
Authors registered in the RePEc Author Service: Jose Ramon Garcia

No 889, Working Papers from Barcelona School of Economics

Abstract: In this paper we present an unemployment model with labour market frictions and monopolistic competition in the goods market. We consider different collective wage-setting systems and compare wages, the unemployment rate and labour market tightness at firm, sector and national (centralized) levels. We find that the Calmfors-Driffill hypothesis is maintained under labour market frictions. In other words, unemployment will be thighest when the bargaining occurs at an industry-wide level. We find, both empirically and analytically, that regulation in the goods market plays a crucial role in explaining these findings. It may contribute to explaining the historical relationship between wage bargaining institutions and unemployment. Additionally, we show that the Calmfors-Drifill results are conditioned by the tax structure and the progressivity of labour income taxes. This fact might explain the lack of robustness in the findings relating to the relationship between wage bargaining institutions and unemployment of many empirical studies on the Calmfors-Driffill hypothesis.

Keywords: monopolistic competition; Disequilibrium Unemployment; wage setting systems; policy reforms (search for similar items in EconPapers)
JEL-codes: E24 O41 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:889

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