Labor market institutions and aggregate fluctuations in a search and matching model

Francesco Zanetti

European Economic Review, 2011, vol. 55, issue 5, 644-658

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 in 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, causing inflation to become more volatile. Raising unemployment benefits has the reverse effect on aggregate fluctuations.

Keywords: Labor; market; institutions; Search; and; matching; New; Keynesian; model; Business; cycles (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (86)

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Related works:
Working Paper: Labour market institutions and aggregate fluctuations in a search and matching model (2007)
Working Paper: Labor Market Institutions and Aggregate Fluctuations in a Search and Matching Model (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:55:y:2011:i:5:p:644-658

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