Labor Adjustment Cost, Economic Growth and Employment Effect of Monetary Policy

Abstract

Abstract: Previous work indicates that there exists an “Okun’ s Paradox” in China. In this paper, we add empirically plausible labor adjustment costs (LAC) into a New-Keynesian model with business cycle statistics that match China’s economy. It shows that with labor adjustment costs our model is capable of reproducing these empirical facts. The model simulation results also show that during the new normal period characterized by increasing LAC, there is a lower correlation between aggregate labor demand and output, real wages and cost plus. Meanwhile, it is not appropriate to depend too much on the expansionary monetary policy to solve unemployment problem, as there exists no Philips Curve in both long-term and short-term.

Key words: labor adjustment costs, new-Keynesian model, employment

Yang Liu, Qi Xiaotong, Zhou Huijuan, Cai Wenjuan, Huang Zhuo. Labor Adjustment Cost, Economic Growth and Employment Effect of Monetary Policy[J]. Management Review, 2022, 34(8): 29-42.

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