Working Paper: CEPR ID: DP2592
Authors: Michael C. Burda; Mark Weder
Abstract: This paper evaluates complementarities of labour market institutions and the business cycle in the context of a stochastic dynamic general equilibrium model economy. Matching between workers and vacancies with endogenous time spent in search, Nash-bargained wages, payroll taxation, and differential support for unemployed labour in search and leisure are central aspects of the model. For plausible regions of the policy and institutional parameter space, the model exhibits more persistence than standard RBC models and can exhibit indeterminacy of rational expectation paths without increasing returns in production. Furthermore, labour market institutions act in a complementary fashion in generating these
Keywords: business cycles; European labour markets; indeterminacy
JEL Codes: E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labour market institutions (J08) | equilibrium unemployment (J64) |
| labour market institutions (J08) | business cycles (E32) |
| high misclassification rates in unemployment insurance (J65) | indeterminate dynamics (C69) |
| high replacement ratio (C59) | indeterminate dynamics (C69) |
| balanced budget policies (E62) | economic cycles (E32) |
| pessimistic expectations (D84) | reduced investment (G31) |
| reduced investment (G31) | increased unemployment (J65) |
| increased unemployment (J65) | economic downturns (F44) |