Working Paper: CEPR ID: DP7650
Authors: Wolfgang Lechthaler; Christian Merkl; Dennis J. Snower
Abstract: In this paper we propose a novel way to model the labor market in the context of a New-Keynesian general equilibrium model, incorporating labor market frictions in the form of hiring and firing costs. We show that such a model is able to replicate many important stylized facts of the business cycle. The reactions to monetary and real shocks become much more sluggish. Job creation and job destruction are negatively correlated. And the volatility of unemployment is much larger than in the standard search and matching model.
Keywords: Business Cycle; Statistics; Hiring and Firing Costs; Labor Market; Monetary Persistence
JEL Codes: E24; E32; E52; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor Market Frictions (hiring and firing costs) (J63) | Sluggish Labor Market Response (J48) |
| Sluggish Labor Market Response (J48) | Output Persistence (G35) |
| Sluggish Labor Market Response (J48) | Unemployment Persistence (J64) |
| Labor Market Frictions (hiring and firing costs) (J63) | Output Persistence (G35) |
| Labor Market Frictions (hiring and firing costs) (J63) | Unemployment Persistence (J64) |