Labour market rigidities: A DSGE approach

DSGE models are frequently applied tools in modern macroeconomic modelling. They are used to describe the behavior of the economy. The goal of this paper is to capture the dynamics of the labour market in a small open economy. For our estimation we chose a specific DSGE model and applied it to the Hungarian economy. This model contains search and matching mechanisms, while the wages and the worked hours are the result of the Nash bargaining problem. The wage and price rigidities are modelled according to the approach developed by Rotemberg. This method somewhat differs from the widely used Calvo price setting. The model is able to capture the great degree of openness of the Hungarian economy and the relatively high levels of frictions. Furthermore the model confirms the weakness of the trade unions. Surprisingly, the results show quite low influence of the labour market on the dynamics of the rest of the economy.