Non-Walrasian Labor Market and the European Business Cycle

Francesco Zanetti

No 574, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper investigates to what extent a New Keynesian, monetary model with the addition of a microfounded, non-Walrasian labor market based on union bargaining is able to replicate key aspects of the European business cycle. The presence of a representative union permits to explain two features of the cycle. First, it generates an endogenous mechanism which produces persistent responses of the economy to both supply and demand shocks. Second, labor unionization causes a lower elasticity of marginal costs to output. This leads to lower inflation volatility. The model can replicate the negative correlation between productivity shocks and employment in the data. Model simulations show the superiority of the unionized framework to reproduce European business cycle statistics relative to a model with competitive labor market.

Keywords: trade unions; business cycle; inflation; persistance (search for similar items in EconPapers)
JEL-codes: E24 E31 E32 (search for similar items in EconPapers)
Date: 2003-04-01, Revised 2004-05-20
New Economics Papers: this item is included in nep-eec and nep-lab
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:574

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