Redistributive effects and labour market dynamics

We propose and estimate, using Bayesian techniques, a Dynamic Stochastic General Equilibrium model featuring search and matching frictions with redistributive productivity shocks – which account for fluctuations in the distribution of income across factors of production. We first find supporting evidence that the model is able to replicate cyclical properties of labour market variables. We then disentangle two endogenous sources of labour market amplification: (i) deep habits and (ii) the replacement ratio. The latter appears to be a powerful endogenous amplification mechanism given the shock structure of the model. As far as the exogenous amplification is concerned, labour market variability can be largely explained by redistributive innovations. Finally, contrary to Total Factor Productivity shocks, redistributive shocks increase total hours.