Macroeconomics of the Labor Market

Transcription

1 Macroeconomics of the Labor Market By Christian Merkl CES-Lecture 3: Monetary and Fiscal Policies under Frictional Labor Markets Munich, August 2013

2 Monetary and Fiscal Policy Monetary policy: small scale New Keynesian model (NKM) Empirical problems Unappealing/unrealistic normative issues Fiscal policy: Real Business Cycle model (RBC) or NKM Size of fiscal multipliers Non-traditional crisis measures Optimal tax behavior 2

3 Agenda Monetary Policy Show most important building block of NKM Empirical shortcomings Labor markets: Positive issues Normative issue Fiscal policy Issues Virtues of labor market analysis 3

4 The New Keynesian Model Key ingredients: RBC model (see lecture 2 for a labor centric RBC model without capital) Monopolistic competition Price rigidities (e.g. Calvo, Taylor, Rotemberg) 4

5 Stylized Model Structure 5

6 Wholesale and Retail Sector CES production technology: Rotemberg adjustment costs: s.t.: 6

7 Problem 1: No endogenous persistence Reaction of the standard small scale loglinearized three equation model to a one-off interest rate shock: No (endogenous) model persistence at all! 7

8 Problem 2: The Divine Coincidence The standard small-scale new Keynesian framework implies no trade-off between output and inflation stabilization. Stabilizing the welfare relevant output is equivalent to stabilizing inflation. Blanchard and Galí (2007) write that the divine coincidence is at odds with central bankers perception. The introduction of real rigidities may break the divine coincidence. 8

9 Monetary Policy and the Labor Market Channel 1: Wage Rigidities A labor market with flows offers the possibility to solve these problems. The bilateral monopoly and the wage bargaining in search and matching model offers the natural laboratory for modeling wage rigidities (no Barro critique). Wage rigidities may make marginal costs more persistent and thus may make inflation more persistent In addition: breaking the divine coincidence 9

10 Standard Framework: Wage Rigidities and Inflation t E t t r mc t More persistent real marginal costs generate more persistent inflation! BUT: Barro Critique 10

11 Search and Matching Framework: Wage Rigidities and Inflation However, Krause and Lubik (2007) show that there is countervailing effect in the search and matching framework: Rigid wages labor market tightness varies more over the cycle Thus, the costs of hiring a worker is more cyclical with rigid wages (i.e. increases more in a boom)! 11

12 Search and Matching Framework: Wage Rigidities and Inflation Baseline: money growth shock Source: Krause/Lubik (2007) 12 Rigid wages: money growth shock

13 Monetary Policy and the Labor Market Channel 2: Firing Costs Firing costs can only be integrated into a labor market with flows. Firing costs depress labor market flows and thereby increase the persistence of employment and output. Positive analysis: Lechthaler, Merkl, Snower (2010) Firing costs generate an important externality! Normative analysis: Faia, Lechthaler, Merkl (2013) 13

14 Digression: Labor Selection Every searching employee can contact one employer per discrete time period. Suitability of employers and employees is determined in an interview (drawing an idiosyncratic iid cost shock). Applicants with low idiosyncratic cost shocks obtain a job offer. Existing worker-firm pairs also draw from idiosyncratic shock distribution. The labor market is driven by selection/deselection. 14

15 Digression: Why Labor Selection instead of Search and Matching? Advantages No black box Analysis of labor market institutions more explicit No amplification puzzle 15

16 Graphical Illustration Cumulative distribution 1 Firing Rate Job Finding Rate 0 Important Retention rate > job finding rate 16

17 Labor Selection: Equations Hiring threshold with Thus: Firing threshold 17

18 Illustration: Reaction to an Autocorrelated Interest Rate Shock Source: Lechthaler et al. (2010) 18

19 The Role of Labor Turnover Costs Source: Lechthaler et al. (2010) 19

20 Price Stability versus Optimal Ramsey Policy: Reaction to Productivity Shock Source: Faia et al. (2013) 20

21 Externality More recruiting today reduces the pool of future applicants (not taken into account by atomistic firms). Entrants have lower idiosyncratic costs on average composition effect! Externality is not internalized by standard wage bargaining mechanisms. Optimal monetary policy reduces the externality. Mechanism: Employment fluctuations 21

22 Optimal Inflation Volatility and Firing Costs Source: Faia et al. (2013) 22

23 Fiscal Policy Add fiscal sector to the model (e.g. income taxes, value added taxes and profit taxes and government spending). Advantages of having a labor market: Reconsider size of fiscal multiplier Reconsider adjustment path Analyze non-standard measures (e.g. labor market subsidies or short-time work). 23

24 Fiscal Policy: Evaluation of Different Measures Source: Faia et al. (2012) 24

25 Optimal Fiscal Policy: Tax Smoothing? Frictionless labor market model calls for smooth labor taxation over the cycle. Arseneau and Chugh (2013) show that this result may not hold any more under search and matching labor markets (Hagedorn/Manovskii calibration) tax volatility may induce efficient (smaller) fluctuations of labor markets. This result is linked to the result that the search and matching model can only generate amplification under inefficient wage formation (social planner solution is not decentralized). 25

26 Conclusion Monetary policy: Wage rigidities: break divine coincidence, but do not necessarily generate more inflation persistence. Firing costs: break divine coincidence and generate more output persistence. Fiscal policy: Reaction to traditional government spending changes. Analysis of non-standard measures. Optimal taxation different! The labor market matters for macroeconomic policies! 26

27 References Arseneau, David and Chugh, Sanjay (2012). Tax Smoothing in Frictional Labor Markets. Journal of Political Economy, Vol. 120, Blanchard, Olivier, and Galí, Jordi (2007): "Real Wage Rigidities and the New Keynesian Model." Journal of Money, Credit, and Banking, Vol. 39, No. 1, Supplement, Faia, Ester, Lechthaler, Wolfgang, and Merkl, Christian (2013): Labor Selection, Turnover Costs and Optimal Monetary Policy. Journal of Money, Credit, and Banking, forthcoming. Faia, Ester, Lechthaler, Wolfgang, and Merkl, Christian (2013): Fiscal Stimulus and the Labor Market Policies in Europe. Journal of Economic Dynamics and Control, Vol. 37 (3), 2013, Krause, Michael, Lubik, Thomas (2007). The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions. Journal of Monetary Economics, Vol. 54 (3), Lechthaler, Wolfgang, Merkl, Christian, and Snower, Dennis (2010): Monetary Persistence and the Labor Market: A New Perspective. Journal of Economic Dynamics and Control, Vol. 34 (5), 2010,