Essays on labour market institutions and macroeconomic dynamics
Labour market reforms play an important role in the public debate and policy recommendations. This thesis aims to find evidence on how labour market institutions are related to economic dynamics and adjustment. The thesis contains an introductory chapter and three essays. The first essay uses data of OECD countries to study whether differences in labour market institutions explain the differences in business cycle dynamics across OECD countries. The second and third essays use theoretical models to study centralized wage-setting and wage-setting coordination. The results of the first essay suggest that labour market institution variables have explanatory power for the heterogeneity in the volatilities of macroeconomic variables and in shock adjustment. When assessing the scope that labour market reforms could achieve in changing the shock adjustment process of an economy, the results suggest only modest changes. Whether the relation between institutional variables and model parameters is assumed to be deterministic or stochastic is found to have a large impact on the statistical inference. The second essay shows how centralized wage-setting can be modelled in a contemporary macroeconomic modelling framework and analyses how centralized wage-setting matters for monetary policy and what aggregate welfare consequences centralized wage setting can have. It is illustrated that when the economic environment contains imperfections, wage setting by a large union that internalizes its actions, has possibility to lead to more optimal allocations than wage setting at the firm level. The third essay studies wage-setting coordination. The modelling framework is an open economy model, and wage-setting coordination takes place between unions of tradable and non-tradable sectors. The results suggests that in an open economy large wage setters have possibility to increase aggregate welfare over market allocations through the exploitation of terms of trade externality. However, the strategic interaction between labour unions has tendency to bring the economy to a worse equilibrium. It is found that if non-tradable sector wages are pegged to wage developments at the tradable sector when the economy adjusts to shocks, it produces large welfare losses for the non-tradable sector, which speaks against the importance of wage norms set by the tradable sector. ...
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