Business cycle, unemployment benefits and productivity shocks

The dimension of aggregate fluctuations is quite different between the European and US economies. Such a result fully justifies attention to non-Walrasian features for improving the empirical performance of the RBC model. In this paper, we introduce two features, present in European economies, into the standard general setting of the infinite-horizon stochastic growth paradigm: trade union behavior and unemployment benefits. We show that this non-Walrasian economy (i) improves the ability to account for the stylized facts, (ii) displays realistic features in explaining the employment and productivity puzzles, (iii) may account for contractions.