Labor market changes don’t affect output
Albertini et al. 12 – University of Every; Reserve Bank of New Zealand; Reserve Bank of New Zealand
Julien Albertini, Güneş Kamber, and Michael Kirker, “Estimated Small Open Economy Model With Frictional Unemployment,” Pacific Economic Review, Vol. 17, Iss. 2, Pg. 326-353, 5-17-12, https://onlinelibrary.wiley.com/doi/10.1111/j.1468-0106.2012.00585.x
Therefore, the model is unable to generate an internal propagation mechanism from shocks affecting the rest of the economy to the labour market variables. We can see this disconnect between the labour market part and the rest of the model in Figure 9, which presents the variance decomposition of output. In accordance with our argument, shocks to the labour market variables contribute only marginally to the fluctuations in output.
This result is consistent with Christoffel et al. (2009), who use a model with a shock on the separation rate instead of on the matching function. They find that the contribution of vacancy shocks to unemployment and vacancies fluctuations is important but that the latter shock does not affect output fluctuations. In addition, they find that the contribution of the bargaining shock to the labour market variables is relatively small.