2004/02 LEM Working Paper Series

Towards an Evolutionary Interpretation of Aggregate Labor Market Regularities

Giorgio Fagiolo, Giovanni Dosi, Roberto Gabriele
Labor Markets, Dynamics, Aggregate Regularities, Beveridge Curve, Okun Curve, Wage Curve, Matching Models

  JEL Classifications
J63, J64, O12, J41

Three well-known aggregate regularities (i.e. Beveridge, Wage, and Okun's curves) seem to provide a quite complete picture of the interplay between labor market macro-dynamics and business cycle. Nevertheless, existing theoretical literature still lacks micro-founded models which are able to jointly account for these three crucial stylized facts. In this paper, we present an agent-based, evolutionary, model trying to formalize from the bottom up individual behaviors and interactions in both product and labor markets. We describe as endogenous processes both vacancy and wage setting, as well as matching and bargaining, demand and price formation. Firms enjoy labor productivity improvements (technological progress) and are selected on the base of their revealed competitiveness (which is also affected by their hiring- and wage-setting behaviors). Simulations show that the model is able to robustly reproduce Beveridge, Wage and Okun's curves under quite broad behavioral and institutional settings. Moreover, the system generates endogenously an Okun's coefficient greater than one even if individual firms employ production functions exhibiting constant returns to labor. Montecarlo simulations also indicate that statistically detectable shifts in Okun's and Beveridge curves emerge as the result of changes in institutional, behavioral, and technological parameters. Finally, the model generates quite sharp predictions about how system parameters affect aggregate performance (i.e. average GDP growth) and its volatility.

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