Abstract
The unemployment rate in Israel declined from 10 percent in 2009, following the Global Financial Crisis, to 3.5 percent in 2019, just before the global COVID-19 crisis. Using an empirically oriented DSGE model, with a focus on the labor market, I estimate and analyze the main contributions to that decline. The model departs from the neoclassical approach to the labor market by including search and matching frictions, endogenous participation, nominal wage rigidity, salaried employees, efficient bargaining over hours worked and coexistence of both margins—extensive (employment) and intensive (hours worked). The model is estimated, based on the Bayesian approach, using quarterly data of the Israeli economy from 1992 to 2019. It generates labor-share dynamics which, although supported by robust empirical evidence, are not replicated by standard models. A model-based analysis sheds light on a positive trend in productivity, and a negative one in employees' bargaining power, as two dominant contributions to the boom in the Israeli labor market—a boom that was interrupted by the outbreak of the global COVID-19 crisis in 2020. Finally, accounting for possible reallocation effect of the COVID-19 crisis, the model is employed to discuss policy considerations related to unemployment benefits.
JEL classification: E24, E32.
Keywords: DSGE models, labor market search.