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[Vol.26 No.4] Labor Market and Business Cycles in Korea: Bayesian Estimation of a Business Cycle Model with Labor Market Frictions

Group : Macro Economy
Economic Research Institute (82-2-759-5490) 2020.12.31 760

Authour: Junhee Lee(Yeungnam Univ.)

Typical business cycle models have difficulties in explaining key macroeconomic labor market variables, such as employment and unemployment, as they usually consider labor hour choices only. In this paper, we introduce labor market search and matching frictions into a New Keynesian nominal rigidity model and estimate it by Bayesian methods to examine the dynamics of the key labor market variables and business cycles in Korea. The results show that unemployment rates are largely explained by technology shocks, which affect the labor demand side, as well as labor supply shocks. In addition, wage bargaining shocks originating from the bargaining process between firms and workers have non-negligible negative effects on output and employment growth, and careful measures need to be taken to limit their adverse effects.