Macroeconomic Policy Lessons of Labor Market Frictions

Eran Yashiv ()

No 446, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The paper explores the consequences of macroeconomic policy for labor market outcomes in the presence of frictions. It shows how policy may be useful in overriding frictions, as well as how it might generate adverse outcomes. The analysis looks at the main tools of macroeconomic policy and pertains to both the non-stochastic steady state and to business cycle fluctuations. A partial-equilibrium, empirically-grounded model is used to simulate policy effects. It relies on a reduced-form VAR of the actual data to specify the stochastic behavior of exogenous variables, precluding the possibility that labor market results will be affected by misspecifications in other parts of a more general macroeconomic model. The key results are that policy has effects on the stochastic behavior of key variables - measures that reduce unemployment also reduce its persistence and increase the volatility of vacancies. Hiring subsidies and unemployment benefits have substantial effects on labor market outcomes, while employment subsidies or wage tax reductions are not very effective policy instruments.

Keywords: Evaluation; of; Labor; Market; Policies; and; Projects (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2002-03
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Published - published in: European Economic Review, 2004, 48 (2), 259-284

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Journal Article: Macroeconomic policy lessons of labor market frictions (2004)
Working Paper: Macroeconomic Policy Lessons of Labour Market Frictions (2001)
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