This doctoral dissertation explores the role that institutions and policies can have 
in shaping aggregate economic outcomes. The thesis is comprised of an introductory 
chapter and three independent essays. All essays set up a clear structure 
that specifies how economic agents react to a changing environment. That is, 
each essay builds on the general equilibrium modeling of Macroeconomics. 
The first essay examines the equilibrium effects of occupational human capital 
protection during mass layoffs in a setup where human capital can depreciate 
during unemployment spells and commitment problems prevent markets 
from allocating layoffs optimally. As the consequences of the policy are tightly 
related to occupational mobility, the paper focuses on modeling reallocation 
incentives of heterogeneous workers. In a calibrated model, a policy that concentrates 
involuntary unemployment incidences to inexperienced workers, decreases 
workers’ incentives to reallocate, compared to an equilibrium where 
everyone faces an identical unemployment risk, leading also to a decrease in 
aggregate unemployment. Moreover, this policy change increases the market 
output and on average does not harm the inexperienced workers. 
The second essay explores the effects of unionization in an island model of 
Lucas and Prescott (1974) with different union structures. When a model with 
competitive labor markets is set to match the empirical fact that a large number 
of unemployment spells ends with recalls, an introduction of a large labor 
union, that represents all workers and sets a common economy-wide minimum 
wage, increases unemployment substantially. Moreover, the whole increase 
is about non-search unemployment as search unemployment actually reduces 
marginally. If the same degree of unionization is generated by a continuum of 
small unions, the aggregate unemployment reaction is somewhat smaller. However, 
the increase in non-search unemployment is still considerable. The workings 
of a large union are also explored when the union is assumed to bargain 
over the minimum wage with an employers’ organization. This environment 
leads to a considerably lower increase in aggregate unemployment. Yet again, 
the search intensity of unemployed workers drops significantly. 
In the third essay we show that the cancellation of income and substitution 
effect implied by King-Plosser-Rebelo (1988) preferences breaks tight coeff- 
cient restriction between the slope of the Phillips curve and the elasticity of consumption 
with respect to real interest rate in a sticky price macro model. This 
facilitates the estimation of intertemporal elasticity of substitution using full information 
Bayesian Maximum Likelihood techniques within a structural model. The US data from the period 1984–2007 supports low intertemporal elasticity of 
substitution and strongly rejects a logarithmic and an additively separable utility 
specification commonly applied in the New Keynesian literature.