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Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation

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  • Raquel Fonseca
  • Lise Patureau
  • Thepthida Sopraseuth

Abstract

This paper examines the empirical link between labor market institutions and international business cycle synchronization. Using a data panel of 20 OECD countries over the 1964-2003 period, we evaluate how cross-country labor market heterogeneity affects business cycle comovement. Our estimation strategy controls for a large set of possible factors influencing cross-country GDP correlation, which allows a comparison of our results with those found in previous studies. We find that bilateral trade, trade similarity, monetary and fiscal convergence, as well as EMU membership lead to more synchronized cycles. Our results show that labor market regulations affect the extent of business cycle synchronization. Disparities in employment protection laws and direct taxation tend to lower international comovement while divergence in union density, unemployment benefits, and indirect taxation enhance cross-country correlations. The level of labor market regulations also matters. Heavier employment taxes are found to raise GDP comovement. Copyright � 2010 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 18 (2010)
Issue (Month): 5 (November)
Pages: 865-881

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Handle: RePEc:bla:reviec:v:18:y:2010:i:5:p:865-881

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  1. Alan C. Stockman, 1987. "Sectoral and National Aggregate Disturbances to Industrial Output in Seven European Countries," NBER Working Papers 2313, National Bureau of Economic Research, Inc.
  2. Belot, Michèle & van Ours, Jan C., 2000. "Does the Recent Success of Some OECD Countries in Lowering their Unemployment Rates Lie in the Clever Design of their Labour Market Reform?," IZA Discussion Papers 147, Institute for the Study of Labor (IZA).
  3. Marianne Baxter & Michael A. Kouparitsas, 2004. "Determinants of Business Cycle Comovement: A Robust Analysis," NBER Working Papers 10725, National Bureau of Economic Research, Inc.
  4. Campolmi, Alessia & Faia, Ester, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 0619, European Central Bank.
  5. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
  6. Zsolt Darvas & Andrew K. Rose & György Szapáry, 2005. "Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic," MNB Working Papers 2005/03, Magyar Nemzeti Bank (the central bank of Hungary).
  7. Messina, Julián, 2004. "Institutions and service employment: a panel study for OECD countries," Working Paper Series 0320, European Central Bank.
  8. Richard Holt, 2004. "Exchange Rate Dynamics, Nominal Rigidities And Equilibrium Unemployment," Royal Economic Society Annual Conference 2004 47, Royal Economic Society.
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Cited by:
  1. Jean-Sébastien Pentecôte & Jean-Christophe Poutineau & Fabien Rondeau, 2013. "Trade Integration and Business Cycle Synchronization in the EMU: the Negative Effect of New Trade Flows," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201313, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  2. Faccini, Renato & Rosazza Bondibene, Chiara, 2012. "Labour market institutions and unemployment volatility: evidence from OECD countries," Bank of England working papers 461, Bank of England.
  3. Stefano Gnocchi & Evi Pappa, 2009. "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.
  4. Michael J. Artis & Jarko Fidrmuc & Johann Scharler, 2008. "The transmission of business cycles," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(3), pages 559-582, 07.
  5. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.
  6. Fidrmuc, Jarko & Foster, Neil & Scharler, Johann, 2011. "Labour market rigidities and international risk sharing across OECD countries," Journal of International Money and Finance, Elsevier, vol. 30(4), pages 660-677, June.
  7. Raquel FONSECA & Lise PATUREAU & Thepthida SOPRASEUTH, 2009. "Divergence in Labor Market Institutions and International Business Cycles," Annales d'Economie et de Statistique, ENSAE, issue 95-96, pages 279-314.
  8. Rumler, Fabio & Scharler, Johann, 2009. "Labor market institutions and macroeconomic volatility in a panel of OECD countries," Working Paper Series 1005, European Central Bank.
  9. Jarko Fidrmuc & Neil Foster & Johann Scharler, 2007. "Labour Market Rigidities, Financial Integration and International Risk Sharing in the OECD," CESifo Working Paper Series 2028, CESifo Group Munich.

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