Labor Market Institutions and Wage and Inflation Dynamics

Fatih Macit

Economic Analysis and Policy, 2010, vol. 40, issue 3, 393-410

Abstract: This paper developes a New Keynesian (NK) model that incorporates standard search and matching structure with firing costs. I analyze how labor market institutions affect the macroeconomic dynamics, in particular, wage and inflation dynamics. I particularly look at two important labor market institutions namely unemployment benefits and firing costs. I find that in countries where unemployment benefits are higher and there are more strict employment protection legislations, inflation and wages become less volatile and more persistent. I also find that the level of these labor market institutions affect how wages and inflation respond to exogenous shocks, in particular, to productivity and monetary policy shocks. I first present some empirical evidence that shows a cross-country link between labor market institutions and wages and inflation. Then I build a dynamic stochastic general equilibrium model which provides theoretical support for this empirical evidence.

Keywords: balance of payments; disequilibrium; exchange rates (search for similar items in EconPapers)
JEL-codes: F31 F32 F33 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:40:y:2010:i:3:p:393-410

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