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Labour Market Imperfections, "Divine Coincidence" and Volatility of Employment and Inflation

Author(s): Mirko Abbritti | Andrea Boitani | Mirella Damiani

Journal: Review of Economics and Institutions
ISSN 2038-1379

Volume: 3;
Issue: 1;
Date: 2012;
Original page

Keywords: hiring costs | wage bargaining | output gap | new keynesian Phillips curve

The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state as well as involuntary fluctuations in unemployment. The existence of hiring frictions introduces externalities that, in turn, entail the breakdown of the “divine coincidence” without assuming real wage rigidity. We are able to show that our model with labour market imperfections outperforms the standard New Keynesian model as for the persistence of responses to monetary shocks. We also attempt an analysis of the volatility of two economies, differing in their “degrees of imperfection”. It turns out that “rigid” economies exhibit less unemployment volatility and more inflation volatility than “flexible” economies.
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