DP2592 Complementarity of Labour Market Institutions, Equilibrium Unemployment and the Persistence of Business Cycles

Author(s): Michael C Burda, Mark Weder
Publication Date: October 2000
Keyword(s): Business Cycles, European Labour Markets, Indeterminacy
JEL(s): E24, E32
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2592

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