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Abstract:How do changes in labor market institutions like more generous unemployment benefits in one country affect labor market outcomes in other countries? We set up a two-country Armingtonian trade model with frictions on the goods and labor markets. Contrary to the literature, higher labor market frictions increase unemployment at home and abroad. The strength of the spillover depends on the relative size of countries and on trade costs. It is exacerbated when real wages are rigid. Using panel data for 20 rich OECD countries, and controlling for institutions as well as for business cycle comovement, we confirm our theoretical predictions. JEL classification: F11, F12, F16, J64, L11 Abstract How do changes in labor market institutions like more generous unemployment benets in one country aect labor market outcomes in other countries? We set up a two-country Armingtonian trade model with frictions on the goods and labor markets. Contrary to the literature, higher labor market frictions increase unemployment at home and abroad. The strength of the spillover depends on the relative size of countries and on trade costs. It is exacerbated when real wages are rigid. Using panel data for 20 rich OECD countries, and controlling for institutions as well as for business cycle comovement, we conrm our theoretical predictions. Gabriel Felbermayr

Abstract:It is common knowledge that the standard New Keynesian model is not able to generate a persistent response in output to temporary monetary shocks. We show that this shortcoming can be remedied in a simple and intuitively appealing way through the introduction of labor turnover costs (such as hiring and firing costs). Assuming that it is costly to hire and fire workers implies that the employment rate is slow to converge to its steady state value after a monetary shock. The after-effects of a shock continue to exert an effect on the labor market even long after the shock is over. The sluggishness of the labor market translates to the product market and thus the output effects of the monetary shock become more persistent. Under reasonable calibrations our model generates hump-shaped output responses. In addition, it is able to replicate the Beveridge curve relationship and a negative correlation between job creation and job destruction.

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