Market Imperfections, Labor Market Rigidities, and the Effects of Monetary Policy

Despite its innovative approach and relevance in solving a number of micro-macro paradoxes, the modern business cycle literature has serious drawbacks, some of which are due to its simplistic view of the labor market. Business cycle models that incorporate nominal rigidities (known as New-Keynesian) are centered on the product market and largely independent of the labor market literature.

The compartmentalization of research into labor economics and business cycle is unfortunate, as some of the most important adjustment processes relevant to the relation between real and nominal macroeconomic variables originate in the labor market. Costs of hiring and firing, costs of accumulating human capital, costs of wage negotiations, and so on, can all be sources of lengthy adjustments – not only in the labor market, but also, by implication, in the product market.

Against this background, the Kiel Institute for the World Economy, in cooperation with partner institutions, has embarked on a policy-oriented network project (“Ensuring Economic and Employment Stability”) that addresses the link between business cycles and unemployment. The network is part of the wider monetary-macroeconomics network of the Kiel Institute and includes the following partner institutions:

• Centre de Recerca en Economia Internacional (Universitat Pompeu Fabra), Spain
• Cologne Institute for Economic Research, Germany
• Deutsche Bundesbank, Germany
• European Central Bank, Germany
• Institute for Employment Research, Germany
• Macroeconomic Policy Institute, Germany
• South African Reserve Bank Chair and University of Pretoria, South Africa
• University College London (Department of Economics), Britain
• University of Aarhus (School of Economics and Management), Denmark
• University of Pavia (Department of Economics and Quantitative Methods), Italy