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The Role of Labor Market Institutions on Wage and Inflation Dynamics: Empirical Evidence from OECD Economies

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  • Fatih Macit

    ()
    (Department of Economics, Beykent University, Istanbul, TURKEY 34396)

Abstract

This paper investigates empirically how labor market institutions affect wage and inflation dynamics, particularly the volatility of real wage growth and inflation using a panel data for OECD economies. I also look at how the rate of unemployment is affected by the larger set of labor market variables that captures diverse aspects of the labor market. The main finding of the paper is that benefit replacement rate is the most significant variable in explaining the volatility of real wage growth and inflation. Besides that union density and bargaining coordination also play an important role in explaining the volatilities in these variables. These results for the benefit replacement rate and union density also support the findings of the theoretical models. It is also shown that the labor market institutions have a considerable influence on the level of unemployment as higher levels of benefit replacement rate, longer durations of unemployment benefits, and a higher union density are expected to lead to a higher level of unemployment.

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Bibliographic Info

Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

Volume (Year): 40 (2010)
Issue (Month): 1 (March)
Pages: 64-77

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Handle: RePEc:eap:articl:v40:y:2010:i:1:p:64-77

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Keywords: Inflation dynamics; wage dynamics; labor market institutions;

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  1. Luca Sala & Antonella Trigari & Mark Gertler, 2007. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," 2007 Meeting Papers 353, Society for Economic Dynamics.
  2. Nunziata, Luca & Bowdler, Christopher, 2005. "Inflation Adjustment and Labour Market Structures: Evidence from a Multi-Country Study," IZA Discussion Papers 1510, Institute for the Study of Labor (IZA).
  3. Campbell Leith & Jim Malley, 2002. "Estimated Open Economy New Keynesian Phillips Curves for the G7," Working Papers 2002_8, Business School - Economics, University of Glasgow.
  4. Rumler, Fabio, 2005. "Estimates of the open economy New Keynesian Phillips curve for euro area countries," Working Paper Series 0496, European Central Bank.
  5. Mark Gertler & Antonella Trigari, 2006. "Unemployment fluctuations with staggered Nash wage bargaining," Proceedings, Federal Reserve Bank of San Francisco.
  6. Krause, M.U. & Lubik, T.A., 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Discussion Paper 2003-113, Tilburg University, Center for Economic Research.
  7. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  8. Christoffel, Kai & Linzert, Tobias, 2005. "The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics," Working Paper Series 0556, European Central Bank.
  9. Rumler, Fabio & Scharler, Johann, 2009. "Labor market institutions and macroeconomic volatility in a panel of OECD countries," Working Paper Series 1005, European Central Bank.
  10. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  11. Fatih Macit, 2010. "Labor Market Institutions and Wage and Inflation Dynamics," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 40(3), pages 393-410, December.
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