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This paper explores the e¤ects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay o¤, typically at least a couple of years. This is partly because the bene…ts materialize through …rm entry and increased hiring, both of which are gradual processes, while any reform-driven layo¤s are immediate. Some reforms such as reductions in employment protection increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deationary e¤ects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath either because of the zero bound on policy rates or because of membership in a monetary union may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large e¤ect on transition costs.

This paper examines whether the search and matching frictions in the New Keynesian framework can account for cross-country differences in cyclical properties of labor mar-kets. Our particular focus is the joint effect of two labor market institution variables: em-ployment protection and replacement income of unemployed workers. We first document an empirical regularity that higher degrees of employment protection and/or lower replace-ment rates raise the standard deviation of real wages relative to unemployment in OECD members. However, there is a positive correlation between employment protection and re-placement rates implying that the net effect of a systematic change in these two institution variables could be ambiguous. Then we show that a model of search and matching friction is broadly consistent with the stylized fact: in the model, higher firing costs and/or lower replacement rates generate higher volatility of real wages relative to unemployment. Al-though the model is not able to generate enough variation in the relative standard deviation observed in the data, we find that a good part of this feature arise from increases in real wage volatility which is tightly linked with the volatility of the labor market tightness. ∗I thank... and seminar participants in. Any remaining errors are my own. The views expressed in this paper are not necessarily those of the Bank of Japan.

Do country-speci…c labor market frictions hiring and …ring restrictions and protection of unemployed workers a¤ect the consequences of trade integration? I address this question in a two-country model of trade and macroeconomic dynamics with heterogeneous …rms, endogenous producer entry, and search and matching frictions in the labor market. I study the dynamic e¤ects of trade integration on unemployment and economic activity and the business cycle implications of stronger trade linkages. The model introduces a novel source of ampli…cation and propagation of domestic and international shocks, as cyclical uctuations in job creation and destruction a¤ect the pro…tability of producer entry into domestic and export markets. I show that domestic labor market frictions are an important determinant of short- to medium-term e¤ects of trade integration. As trade barriers are reduced, unemployment initially rises (falls) in countries with more rigid (exible) labor markets. In the long run, average productivity gains ensure positive employment e¤ects in both countries. Trade is always bene…cial for welfare, but the economy with a rigid labor market gains less. Also, a exible country bene…ts from the rigidity of its partner. In contrast to benchmark international real business cycle models, but consistent with the data, the model predicts that trade integration leads to increased business cycle synchronization. Volatility increases in the country with a rigid labor market, but it falls for the exible partner. JEL classi…cation: E32, F16, F41, J60.

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The standard two-sector monetary business cycle model suffers from an important defi-ciency. Since durable good prices are more flexible than non-durable good prices, optimising households build up the stock of durable goods at low cost after a monetary contraction. Consequently, sectoral outputs move in opposite directions. This paper finds that labour market frictions help to understand the so-called sectoral “comovement puzzle”. Our bench-mark model with staggered Right-to-Manage wage bargaining closely matches the empirical elasticities of output, employment and hours per worker across sectors. The model with Nash bargaining, in contrast, predicts that firms adjust employment exclusively along the

The standard two-sector monetary business cycle model suffers from an important defi-ciency. Since durable good prices are more flexible than non-durable good prices, optimising households build up the stock of durable goods at low cost after a monetary contraction. Consequently, sectoral outputs move in opposite directions. This paper finds that labour market frictions help to understand the so-called sectoral “comovement puzzle”. Our bench-mark model with staggered Right-to-Manage wage bargaining closely matches the empirical elasticities of output, employment and hours per worker across sectors. The model with Nash bargaining, in contrast, predicts that firms adjust employment exclusively along the

Reforming the labor market and improving competitiveness: an analysis for Spain using FiMod

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An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: Twww.CESifo-group.org/wp T CESifo Working Paper No. 2935