Working Papers,
National Institute of Economic Research

Abstract: This is a description of the labor market sector in the dynamic medium term macroeconomic model KIMOD developed at the National Institute of Economic Research (NIER).

Unemployment is caused by matching inefficiencies of the type described by C. Pissarides in Equilibrium Unemployment, 2000. Unemployed workers and firms with vacant jobs are engaged in costly search for a profitable match. Total hirings from unemployment into employment depend on the number of unemployed workers and vacant jobs. Flows into unemployment come from new entrants into the labor force and from exogenous separation of matched job - worker pairs.

Wages are set in individual negotiations between the worker and the firm in a match, according to the Nash bargaining solution. Some inertia in real wages follows from unemployment benefits being indexed to the previous period?s market wage.

These features lead to an unemployment rate which adjusts with some inertia towards a long run equilibrium level. Turnover costs provide some incentives for labor hoarding by firms during temporary downturns. The effects on the economy from variations in hours worked due to variations in the labor force are distinct from those due to variations in average working time.

The model is used to estimate the equilibrium unemployment level in Sweden from Swedish labor market data on unemployment and vacancies

Keywords: labor market; matching; modeling; search; unemployment; wage bargaining

JEL-codes: C51; C78

35 pages, February 1, 2004

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