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Labor Market Institutions, Fiscal Multipliers, and Macroeconomic Volatility

Author

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  • Maximilian Boeck
  • Jesús Crespo Cuaresma
  • Christian Glocker

Abstract

We study empirically how various labor market institutions – (i) union density, (ii) unemployment benefit remuneration, and (iii) employment protection – shape fiscal multipliers and output volatility. Our theoretical model highlights that more stringent labor market institutions attenuate both fiscal spending multipliers and macroeconomic volatility. This is validated empirically by an interacted panel vector autoregressive model estimated for 16 OECD countries. The strongest effects emanate from employment protection, followed by union density. While some labor market institutions mitigate the contemporaneous impact of shocks, they, however, reinforce their propagation mechanism. The main policy implication is that stringent labor market institutions render cyclical fiscal policies less relevant for macroeconomic stabilization.

Suggested Citation

  • Maximilian Boeck & Jesús Crespo Cuaresma & Christian Glocker, 2022. "Labor Market Institutions, Fiscal Multipliers, and Macroeconomic Volatility," CESifo Working Paper Series 9749, CESifo.
    • Handle: RePEc:ces:ceswps:_9749
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    More about this item

    Keywords

    fiscal policy; fiscal multipliers; labor market institutions; interacted panel VAR;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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