Labour market dynamics in the euro area: A model-based sensitivity analysis

Alistair Dieppe (), Jerome Henry and Peter Mc Adam ()
Additional contact information
Peter Mc Adam: European Central Bank
Authors registered in the RePEc Author Service: Peter McAdam ()

Modeling, Computing, and Mastering Complexity 2003 from Society for Computational Economics

Abstract: The lack of euro area labour market flexibility is a commonly mentioned issue. In particular, the relatively weak response of wages to high unemployment can pose adjustment problems. We address the issue using extensive simulations of an estimated macro-econometric model for the euro area (the Area Wide Model). The model is characterised by a well-pinned down, unique equilibrium unemployment rate but with relatively slow convergence dynamics. The interaction between unemployment dynamics and the policy conducted is investigated under a number of alternative assumptions on the labour market, using both deterministic and stochastic simulations. Resulting impulse-responses are analysed, as well as the distribution of unemployment (stacked across a large number of simulations), with a particular focus on situations where large deviations from the deterministic steady state occur. The analysis is done, first, with the standard version of the model, to provide a benchmark consistent with its estimated parameters. A similar exercise is then conducted allowing for a stronger wage response to unemployment and for a higher employment elasticity to real wages. In turn, a specifically adverse configuration is analysed, where, due to imposed asymmetries in the Phillips curve, high unemployment results in lower wage responses than those estimated. Such a feature could put the economy in a situation where unemployment remains well beyond its long-run equilibrium value for a protracted period. We then assess the performance of alternative specifications of the Taylor rule under the various labour market structures, with especially, different degrees of aggressiveness and forward-lookingness of monetary policy. One main result is that the differences across labour market configurations are significantly less marked once a forecast-based rule is employed.

Keywords: Unemployment; Monetary Policy; Euro Area; Non Linearity (search for similar items in EconPapers)
JEL-codes: C53 E24 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp, nep-eec and nep-lab
References: Add references at CitEc
Citations:

Downloads: (external link)
http://zai.ini.unizh.ch/www_complexity2003/doc/Paper_Henry.pdf
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to zai.ini.unizh.ch:80 (No such host is known. )

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sce:cplx03:09

Access Statistics for this paper

More papers in Modeling, Computing, and Mastering Complexity 2003 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().