French and American labour markets in response to cyclical shocks between 1986 and 2007: a DSGE approach

Abstract

Until the current economic crisis, the recovery capacity of the American and French labour markets had often been compared. The United States had been considered more "resilient", namely more affected by cyclical shocks in the short term but more quickly coming back to their initial path in the medium term. As this conclusion may be modified in the context of the current crisis, it is also relevant to study if it is actually valid on the previous period. Between 1986 and 2007, the output gap of the United States presented more pronounced fluctuations and came back to the equilibrium more rapidly. However, it does not mean that the United States were more resilient since it can also result from the fact that the American economy was affected by other kinds of shocks than the French economy. To distinguish which explanation is the most relevant, it is difficult to use an astructural approach. This study is therefore based on a structural approach directly inspired from Christoffel and Linzert (2005). We use two calibrated DSGE models, one for the French economy, the other for the United States, which include a labour market matching model à la Diamond, Mortensen and Pissarides. The comparison of the impulse response functions between the two models show that differences in resilience cannot be assessed globally: they depend on the shock which affects the economy. The differences are the most significant for shocks related to the labour market but they are less sensible for standard shocks like productivity shocks or monetary shocks. We use the same DSGE models to determine the nature of historical shocks between 1986 and 2007 and to assess the contributions of these shocks to output fluctuations. According to the models, the dynamics of the two economies on the period is thus characterized by different combinations of shocks, rather than different absorption capacity of these shocks.Labour market, matching model, business fluctuations, DSGE model, resilience