Labor Market Institutions and the Business Cycle: Unemployment Rigidities vs. Real Wage Rigidities

46 Pages Posted: 27 Apr 2010

See all articles by Mirko Abbritti

Mirko Abbritti

University of Navarra

Sebastian Weber

International Monetary Fund (IMF)

Date Written: April 12, 2010

Abstract

This paper investigates the importance of labor market institutions for inflation and unemployment dynamics. Using the New Keynesian framework we argue that labor market institutions should be divided into those institutions that cause Unemployment Rigidities (UR) and those that cause Real Wage Rigidities (RWR). The two types of institutions have opposite effects and their interaction is crucial for the dynamics of inflation and unemployment. We estimate a panel VAR with deterministically varying coefficients and find that there is a profound difference in the responses of unemployment and inflation to shocks under different constellations of the labor market.

Keywords: Labor Market Search, Real Wage Rigidity, Unemployment, Business Cycle, Monetary Policy

JEL Classification: E32, E24, E52

Suggested Citation

Abbritti, Mirko and Weber, Sebastian, Labor Market Institutions and the Business Cycle: Unemployment Rigidities vs. Real Wage Rigidities (April 12, 2010). ECB Working Paper No. 1183, Available at SSRN: https://ssrn.com/abstract=1588740

Mirko Abbritti (Contact Author)

University of Navarra ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

Sebastian Weber

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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