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Labour Market Institutions in Open Economy

Povilas Lastauskas and Julius Stakenas ()
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Julius Stakenas: Bank of Lithuania

No 33, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper builds a theoretical model that introduces frictional unemployment in a multisectoral heterogeneous firms model. We allow for multi-worker firms and dynamic matching process. In doing so, we have a rich environment that combines product, labour, and international markets. The focus is on unemployment benefits and employment contingent subsidies. We establish a mechanism, which is different from the standard search and matching model. A change in labour market policies due to the feedback from labour market tightness to wages transforms the share of exporters and affects average productivity. Partial equilibrium effects are overturned for subsidies in general equilibrium due to sectoral arbitrage condition. We address the following questions in the quantitative exercise: How does trade along intensive and extensive margins evolve with changes in labour market policies? How do firms' profitabilities and thus reallocations across exporters/non-exporters react to labour market institu-tions? What are the differences between a domestic and a trade-bloc wide shock? In addition to the theory contribution, we find that unemployment benefits bear differ-ent policy implications with regards to international coordination than employment subsidies. Classification-JEL: E24, F12, F16 Keywords: labour market institutions, heterogeneous multi-worker firms, dynamic matching, openness

Pages: 54 pages
Date: 2016-09-09
New Economics Papers: this item is included in nep-dge, nep-int, nep-lab, nep-mac and nep-sog
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