Labor Market Reforms and Aggregate Supply in the Short and Long Run


This project investigates the impact of labor market reforms on short and long-run dynamics and overall macroeconomic economic performance. It combines microeconomic perspectives of labor markets involving search and matching and other particular frictions in labor markets with dynamic macroeconomic modeling. The starting point is research which embeds natural and man-made frictions in labor markets, leading to qualitatively and quantitatively significant dynamic and steady-state effects in equilibrium models. Besides matching frictions, Nash bargaining in the determination of wages, unemployment benefits and subsidies to non-participation, variable payroll taxes, and costs of search will be explicitly considered. Central is the enforcement of a balanced budget rule for funding of social programs, which often represent 15% or more of GDP in an economy. This feature gives rise to countercyclical payroll tax burdens and thereby a significant time-varying, distortionary wedge in the economy. In this class of models, the persistence of business cycles depends on the size of the social security budget and the way it is financed especially at the margin. In economies in which the social system is financed by general revenues, this effect does not arise, or does so only weakly. Combining work with calibrated DSGE models and an institutionally articulated labor market, the project will make use of newer Bayesian estimation methods to assess the overall plausibility of the modeling strategy. A first objective of this project is to investigate the quantitative significance of the relationship between labor market institutions, reforms and steady state employment, unemployment and taxation at lower frequencies in OECD countries. Germany moved from a low-unemployment equilibrium in the period 1960-1975 to another with high unemployment rates and low employment, culminating in the aftermath of the unification episode (1990-2003). The project findings will not only be useful in accounting for the “German labor market miracle” following the global economic crisis, but may provide useful milestones for developing policies to resuscitate southern European countries. In addition, product market rigidities and regulations will be considered, in order to assess complementarities in the effectiveness of labor market reforms.


Principal Investigators
Burda, Michael C. Prof. Ph. D. (Details) (Economic Theory II)

Duration of Project
Start date: 11/2014
End date: 10/2017

Last updated on 2020-20-03 at 23:16