Structural change and wage formation in an empirical flow model for the labour market

This paper analyzes the impact of supply shocks, demand shocks and policy shocks on labour market dynamics, using a consistent macroeconomic flow model of the Dutch labour market. The long run properties of the model mimic those of the theoretical equilibrium search models, with endogenous vacancy supply, wage formation and matching of unemployed and vacancies. The model also describes the propagation of shocks through different duration classes of unemployment and allows for duration dependent exit probabilities from unemployment. Simulation experiments and a sensitivity analysis show that a shock may bring the labour market out of its long run dynamic equilibrium for a considerable period and that the length of that period depends much on the initial pace of structural change.