When more flexibility yields more fragility: The microfoundations of Keynesian aggregate unemployment

Wages are an element of cost crucially affecting the competitiveness of individual firms. But the wage bill is also a crucial element of aggregate demand. Hence it could be that more \ue2\u80\u9cflexible\ue2\u80\u9d and \ue2\u80\u9cfluid\ue2\u80\u9d labour markets, while allowing for faster inter-firm reallocation of labour, may also render the whole economic system more fragile, more prone to recession, and more volatile. In this work, we investigate some conditions under which such a conjecture applies. The paper presents an agent-based model that investigates the effects of two \ue2\u80\u9carchetypes of capitalism\ue2\u80\u9d \ue2\u80\u93 in terms of regimes of labour governance defined by the mechanisms of wage determination, firing, labour protection and productivity gains sharing \ue2\u80\u93 upon (i) labour market regularities and (ii) macroeconomic dynamics (long-term rates of growth, GDP fluctuations, unemployment rates, inequality, etc.). The model is built upon the \ue2\u80\u9cKeynes meets Schumpeter\ue2\u80\u9d family of models (Dosi et al., 2010), explicitly incorporating different microfounded labour market regimes. Our results show that seemingly more rigid labour markets and labour relations are conducive to coordination successes leading to higher and smoother growth