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number of hires dominates the fall in hours), while investment response lingers slightly above zero during the delay phase. Consumption increases in all cases.22

Inflation fluctuations are also lower when the labour market is more volatile. The reason for this is that a more volatile labour market implies more hiring, which dominates the reduction in hours worked per capita (see Figure 6). More responsive labour supply during the delay reduces wage increase and therefore dampens the increase in marginal cost of firms and inflation.

22In the long run, the increase in output, labour, consumption and investment is higher when the labour firm surplus is lower. This happens because lower surplus of labour firms implies that hours per capita are closer to 1, which implies that the nonlinearity in the production of hours worked by labour firms is in the less concave region.