Labor frictions dampen economic policy impact, altering business cycle dynamics.
Labor frictions like indivisible labor and adjustment costs were added to a model to better understand how they affect the economy. These frictions help the model match real-world data better and show that TFP shocks have less impact on the economy, fiscal policy affects private sector activity more, and monetary policy has a smaller effect on output. This means that labor frictions play a significant role in shaping economic policies and outcomes.