Assessing the empirical relevance of Walrasian labor frictions to business cycle Fluctuations

Paper number: 13/04

Paper date: June 2013

Year: 2013

Paper Category: Discussion Paper

Authors

Joao Madeira

Abstract

This paper describes and estimates (with a Bayesian likelihood approach) an otherwise standard dynamic stochastic general equilibrium model, with both sticky prices and wages, augmented with several labor market rigidities (of a Walrasian nature), namely: indivisible labor, predetermined straight time employment numbers (in which case, firms adjust overtime employment to respond to unexpected shocks), hiring expenses and convex adjustment costs. The results show all these frictions to be empirically important.

Labor frictions are shown to have important implications to business cycle dynamics and economic policy making. Labor frictions imply TFP shocks have a greater role in accounting for business cycle dynamics. Labor frictions also imply fiscal policy to lead to a greater crowding out of private sector activity and monetary policy to be more effective in achieving disinfation.

JEL Classiffcation: E20, E24, E30, E31, E32.

Keywords: DSGE; New Keynesian, labor frictions; indivisible labor; labor adjustment costs; overtime; employment; hours.

Assessing the empirical relevance of Walrasian labor frictions to business cycle Fluctuations Assessing the empirical relevance of Walrasian labor frictions to business cycle Fluctuations