Labor Turnover Costs, Workers' Heterogeneity, and Optimal Monetary Policy

Ester Faia, Wolfgang Lechthaler and Christian Merkl

No 4322, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms' counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation.

Keywords: policy trade-off; labor market frictions; hiring and firing costs; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E24 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2009-07
New Economics Papers: this item is included in nep-lab, nep-mac and nep-mon
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Citations: View citations in EconPapers (12)

Published - revised version published as 'Labor Selection, Turnover Costs and Optimal Monetary Policy' in: Journal of Money, Credit, and Banking, 2014, 46 (1), 115–144

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Working Paper: Labor Turnover Costs, Workers’ Heterogeneity and Optimal Monetary Policy (2009)
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