Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials

How does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks? To answer this question, this paper sets up a dynamic currency union model with monopolistic competition and sticky prices, hiring frictions, and real wage rigidities. In our analysis, we focus on the differentials in inflation and unemployment between countries, as they directly reflect how the currency union responds to shocks. We highlight the following three results. First, we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials. Second, we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials. Finally, we show that it is important to take into account the interaction between different types of labor market rigidities. Overall, our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks.     

An Open Economy DSGE Model with Search-and-Matching Frictions: The Case of Hungary

This article builds and estimates a medium scale, small open economy DSGE model augmented with search-and-matching frictions in the labor market, and different wage setting behavior in new and existing jobs. The model is estimated using Hungarian data between 2001–2008. We find that: (i) the inclusion of matching frictions significantly improves the model’s empirical fit; (ii) the extent of new hires wage rigidity is quantitatively important for key macro variables; (iii) labor market shocks do not play an important role in inflation dynamics, but the structure of the labor market influences the monetary transmission mechanism.     

Capital inflows and asset prices: Evidence from emerging Asia

The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for – roughly – twice the portion of overall house price changes they explain in OECD countries. We also address cross-country differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.     

Transitions in the German labor market: Structure and crisis

Since the so-called Hartz IV reforms around 2005 and during the global crisis of 2008/2009, the German labor market featured mainly declining unemployment rates. We develop a search and matching model with heterogeneous skills to explore the role of structural and cyclical policies for this performance. Calibrating unemployment benefits to approximate legislation before and after the reforms, we find a large reduction in unemployment and its duration, with the transition concluding after about three years. During the crisis, the extended use of short-time labor subsidies that prevent jobs from being destroyed is likely to have prevented strong increases in unemployment.     

Downward wage rigidity and business cycle asymmetries

The growth rates of wages, unemployment and output of a number of OECD countries have a strongly skewed distribution. In this paper we analyze to what extent downward wage rigidities can explain these empirical business cycle asymmetries. To this aim, we introduce asymmetric wage adjustment costs in a New-Keynesian DSGE model with search and matching frictions in the labor market. Increasing wages is less costly than cutting them. It follows that wages increase relatively fast and thus limit vacancy posting and employment creation, but they decline more slowly, leading to a strong reduction in vacancies and employment. The presence of downward wage rigidities strongly improves the fit of the model to the observed skewness of labor market variables and the relative length of expansions and contractions in the output and the employment cycles. The asymmetry also explains the differing transmission of positive and negative monetary policy shocks from wages to inflation.     

Monetary Policy,Trend Inflation,and Unemployment Volatility

The literature has long agreed that the DMP model (after Diamond 1982, Mortensen 1982, Pissarides 1985) with search and matching frictions in the labor market can deliver large volatilities in labor market quantities, consistent with empirical data, only if there is at least some wage stickiness. I show, however, that the model can deliver nontrivial volatilities without wage stickiness, as long as it has price dispersion and nonzero long‐run inflation rates. I find that by keeping inflation at a positive rate, monetary policy may be accountable for the large standard deviations observed on labor market variables. In addition, the Shimer (2005) puzzle disappears under monetary policy shocks.     

A Labor Capital Asset Pricing Model

We show that labor search frictions are an important determinant of the cross‐section of equity returns. Empirically, we find that firms with low loadings on labor market tightness outperform firms with high loadings by 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make dynamic employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time‐variation in the efficiency of the aggregate matching technology. Firms with low loadings are more exposed to adverse matching efficiency shocks and require higher expected stock returns.     

劳动杠杆的定价效力:来自中国A股市场的证据

本文选取中国沪深A股2002年至2018年的季度数据,从公司层面考察了劳动杠杆(由劳动力成本粘性特征导致的企业利润变化率大于产出变化率的经济现象,可理解为不考虑固定成本时经营杠杆的特殊表现形式)对股票截面收益率的定价效力。结果发现:(1)劳动杠杆对截面收益率具有显著负向影响,具体表现为高劳动杠杆公司的收益率低于低劳动杠杆公司的收益率;(2)该影响在控制了公司特征后依然显著存在;(3)该影响在不同经济周期下表现不同:在经济下行期,负向定价效力更为明显。进一步地,本文通过生产率冲击和工资冲击这两个风险来源探究了劳动杠杆的作用机制。结果表明,劳动杠杆一方面通过生产率冲击产生显著正向影响,另一方面通过工资冲击产生显著负向影响。但后者的影响程度显著强于前者,两者的相对重要性取决于上市公司的技术水平。相关结果能够为公司应对劳动力成本上升、理解劳动杠杆的定价机制及相关投资策略的制定和风险管理等提供经验支持。     

Non-stationary Hours in a DSGE Model

The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long-run dynamics that are at odds with the data. Using Bayesian methods we estimate a stochastic growth model in which hours worked are stationary and a modified version with permanent labor supply shocks. If firms can freely adjust labor inputs, the data support the latter specification. Once we introduce frictions in terms of labor adjustment costs, the overall time series fit improves and the model specification in which labor supply shocks and hours worked are stationary is preferred.     

Welfare Cost of Fluctuations When Labor Market Search Interacts with Financial Frictions

We study the welfare costs of business cycles in a search and matching model with financial frictions. The model replicates the volatility on labor and financial markets. Business cycle costs are sizable. Indeed, the interactions between labor market and financial frictions magnify the impact of shocks via (i) a credit multiplier effect and (ii) an endogenous wage rigidity inherent to financial frictions. In addition, in a nonlinear framework, large welfare costs of fluctuations are explained by the high average unemployment and the low job finding rates with respect to their deterministic steady‐state values.     

Labor market reform and price stability: An application to the Euro Area

Central bankers frequently suggest that labor market reform may be beneficial for inflation management. This paper investigates this topic by simulating the effects of reductions in firing costs and unemployment benefits on inflation volatility in the Euro Area, using an estimated New Keynesian model with search and matching frictions. Qualitatively, changes in labor market policies alter the volatility of inflation in response to shocks, by affecting the volatility of the three components of real marginal costs (hiring costs, firing costs and wage costs). Quantitatively, we find, however, that neither policy is likely to have an important effect on inflation volatility, due to the small contribution of hiring and firing costs to inflation dynamics.     

Structural reforms in a debt overhang

The effects of reforms in product and labor markets are assessed in an economy where credit restrictions and long-term debt combine to produce a persistent recession with slow deleveraging following a negative financial shock. We show that product market reforms stimulate output and employment even in the short run, despite their deflationary effects. By favoring a faster recovery of investment and collateral values, such reforms bring forward the end of the deleveraging phase. This channel is missing in the case of labor market reforms, which have more modest effects on economic activity.     

Real exchange rate, productivity and labor market frictions

We extend the classic Balassa-Samuelson model to an environment with search unemployment. We show that the classic Balassa-Samuelson model with the assumption of full employment emerges as a special case of our more generalized model. In our generalized model, the degree of labor market matching efficiency affects the strength of the structural relationship between the real exchange rate and sectoral productivity through influencing labor’s choice between employment and unemployment as well as movement across sectors. When the relative labor market matching friction is high, search unemployment is high and the standard Balassa-Samuelson effect may not hold. Empirical evidence supports our theory: controlling for differences in labor market frictions across countries provides a better fit in estimating the Balassa-Samuelson effect.     

A positive analysis of labor-market institutions and tax reforms

In this paper, we investigate the structure of the “Laffer curve” for taxes on labor and other factors of production, under different institutional frameworks of the labor market. Using a Cobb–Douglas production technology allows us to characterize important properties of the “Laffer curve” in terms of the wage share for a competitive labor market, the monopoly union model, the right-to-manage approach, the insider-dominated union, and efficient Nash bargains simultaneously. In this way, we are able to highlight the menu of factor tax systems, and thus of potential tax reforms available to a government, without perfect knowledge of the mechanism of the labor market. In particular, we show that the employment-maximizing tax system features a constant energy tax, while the energy mini-/maximizing tax system features a constant labor tax. We also illuminate to what extent these results must be modified if we either employ a CES production function, or if we allow for an endogenous reservation wage.     

The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions

We develop a New Keynesian model with search and matching frictions in the labor market. We show that the model generates counterfactual labor market dynamics. In particular, it fails to generate the negative correlation between vacancies and unemployment in the data, i.e., the Beveridge curve. Introducing real wage rigidity leads to a negative correlation, and increases the magnitude of labor market flows to more realistic values. However, inflation dynamics are only weakly affected by real wage rigidity. The reason is that labor market frictions give rise to long-run employment relationships. The measure of real marginal costs that is relevant for inflation in the Phillips curve contains a present value component that varies independently of the real wage.     

Have domestic or foreign factors driven European external imbalances?

This paper examines whether domestic or foreign net saving predominantly influences an economy’s international borrowing and lending with reference to the experience of western European economies that have had sizable current account surpluses and deficits since the turn of the century. It proposes that if an international lender country’s current account surplus is positively (negatively) related to its real long term interest rate, then foreign (domestic) factors are driving its external imbalance. On the contrary, for a foreign borrower country if its current account deficit is positively (negatively) related to its real long term interest rate, domestic (foreign) factors drive its external imbalance. On this basis, it shows econometrically for major European lender economies, Germany, the Netherlands, Switzerland and Sweden, that external imbalances this decade were mainly determined by foreign factors, though by domestic factors for Norway. For major borrower economies, Italy, Spain, Portugal, Ireland and the United Kingdom, the results were not significant implying that neither domestic nor foreign factors predominated over this time.     

Emerging Market Business Cycles: The Role of Labor Market Frictions

Emerging economies are characterized by higher variability of consumption and real wages relative to output and a strongly countercyclical current account. A small open economy model with search‐matching frictions and countercyclical interest rate shocks can account for these regularities. Search‐matching frictions affect permanent income, and increase future employment uncertainty, heightening workers' incentives to save and generating a greater response of consumption and the current account. The greater consumption response feeds into larger fluctuations in workers' willingness to work, while interest rate shocks lead to variations in firms' willingness to hire; both of these outcomes contribute to highly variable wages.     

The great increase in relative wage volatility in the United States

Over the past 25 years, real average hourly wages in the United States have become substantially more volatile relative to output. Microdata from the Current Population Survey (CPS) is used to show that this increase in relative volatility is predominantly due to increases in the relative volatility of hourly wages across different groups of workers. Compositional changes of the workforce, by contrast, account for only a small fraction of the increase in relative wage volatility. Simulations with a Dynamic Stochastic General Equilibrium (DSGE) model illustrate that the observed increase in relative wage volatility is unlikely to come from changes outside of the labor market (e.g. smaller exogenous shocks or more aggressive monetary policy). By contrast, greater flexibility in wage setting due to deunionization and a shift towards performance-pay contracts as experienced by the U.S. labor market is capable of accounting for a substantial fraction of the observed increase in relative wage volatility. Greater wage flexibility also decreases the magnitude of business cycle fluctuations, suggesting an interesting new explanation for the Great Moderation.     

Capital Inflows and the U.S. Housing Boom

We estimate an open‐economy vector autoregressive (VAR) model to study the effect of capital‐inflow shocks on the U.S. housing market. We look at different external shocks that generate capital inflows to the U.S., in particular “saving‐glut” shocks and foreign monetary‐policy expansions. The shocks are identified with theoretically robust sign restrictions derived from an open‐economy dynamic stochastic general equilibrium (DSGE) model. Our findings suggest that capital inflows that result from “saving‐glut” shocks have a positive and persistent effect on real house prices and real residential investment.     

Mood Swings and Business Cycles: Evidence from Sign Restrictions

This paper provides new evidence that bouts of optimism and pessimism are an important source of U.S. business cycles, using the identification schemes based on sign restrictions. We document that identified optimism and pessimism shocks account for about 30% of U.S. business‐cycle fluctuations in hours and output. In addition, our empirical findings are consistent with the intensive‐ and extensive‐margin adjustments in the U.S. labor market over business cycles, providing further support to optimism shocks being an important source of U.S. business cycles. The identified optimism shocks are at least partially rational as total factor productivity is found to rise 8–12 quarters after an initial bout of optimism. While this later finding is consistent with some previous findings in the news shock literature, we cannot rule out that such episodes reflect self‐fulfilling beliefs.