A disequilibrium model with smooth regime transitions and a keynesian spillover for switzerland's labor market

Abstract

This paper presents a disequilibrium labor market model in which aggregation over a continuum of ‘micro markets’ with different demand/supply ratios produces smooth macro relationships, mapping aggregate demand and supply onto actual employment and regime proportions. Aggregate labor demand consists of a classical part - derived on a putty-clay assumption - and a ‘keynesian’ spillover from the goods market. The specification of labor supply incorporates intertemporal substitution. The degree of aggregate imbalances on labor and goods markets is measured by business survey data. The estimated model indicates a growing mismatch between the micro structures of demand and supply of labor. The short-run fluctuations of employment are primarily traced back to the keynesian spillover. Classical determinants of labor demand are relevant as well, but only in the medium-term. Labor supply is rather inert and thus absorbs the swings of labor demand only partly.