Labor frictions drive business cycles, shaping economic policy and private sector activity.
The study looked at how labor market frictions affect the economy during business cycles. They used a model with sticky prices and wages, along with various labor market rigidities. The results showed that these frictions are important in shaping business cycle dynamics. Labor frictions mean that shocks to total factor productivity play a bigger role in driving economic fluctuations. They also suggest that fiscal policy can crowd out private sector activity more, while monetary policy is more effective in reducing inflation.