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Business cycle comovement and labor market institutions: An empirical investigation

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Author Info

  • Raquel Fonseca

    ()
    (RAND 1776 Main Street P.O. Box 2138 Santa Monica, CA 90407-2138, USA)

  • Lise Patureau

    ()
    (THEMA, Université de Cergy-Pontoise Site des Chênes 1 UFR d’Économie et Gestion 33, boulevard du Port 95011 Cergy-Pontoise Cedex, France)

  • Thepthida Sopraseuth

    ()
    (EPEE, CEPREMAP and PSE Jourdan, Departement d’Economie, Univ. d’Evry, 4 Bd F. Mitterand, 91025 Evry Cedex, France)

Abstract

This paper examines the impact of labor market institutions (LMI) on business cycle (BC) synchronization. We first develop a two-country right-to-manage model of wage bargaining. We find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. We then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. Our estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows to confront our results with those found in previous studies. Consistently with our theoretical results, we find that similar labor markets across countries tend to favor more their synchronized cycles. In particular, disparities in tax wedges yields lower GDP co movement. Besides, interactions between labor market institutions do matter, enhancing or dampening the effect of tax wedge divergence on BC synchronization. Our overall results suggest that the impact of distortions in demand-supply labor mechanism should be investigated in international business cycle models.

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Bibliographic Info

Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-05.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-05

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Postal: 33, boulevard du port - 95011 Cergy-Pontoise Cedex
Phone: 33 1 34 25 60 63
Fax: 33 1 34 25 62 33
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Web page: http://thema.u-cergy.fr
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Keywords: International business cycle; Business cycle synchronization; Labor market institutions; Panel Data Estimation;

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References

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  1. Alan C. Stockman, 1989. "Sectoral and National Aggregate Disturbances to Industrial Output in Seven European Countries," NBER Working Papers 2313, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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).
  4. Marianne Baxter & Michael A. Kouparitsas, 2004. "Determinants of Business Cycle Comovement: A Robust Analysis," NBER Working Papers 10725, National Bureau of Economic Research, Inc.
  5. Messina, Julián, 2004. "Institutions and service employment: a panel study for OECD countries," Working Paper Series 0320, European Central Bank.
  6. Campolmi, Alessia & Faia, Ester, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 0619, European Central Bank.
  7. Richard Holt, 2004. "Exchange Rate Dynamics, Nominal Rigidities And Equilibrium Unemployment," Royal Economic Society Annual Conference 2004 47, Royal Economic Society.
  8. 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).
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Cited by:
  1. 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.
  2. Raquel Fonseca & Lise Patureau, 2008. "Divergence in Labor Market Institutions and International Business Cycles," Working Papers 562, RAND Corporation Publications Department.
  3. 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.
  4. 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.
  5. Rumler, Fabio & Scharler, Johann, 2009. "Labor market institutions and macroeconomic volatility in a panel of OECD countries," Working Paper Series 1005, European Central Bank.
  6. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.
  7. 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.
  8. 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.
  9. Stefano Gnocchi & Evi Pappa, 2009. "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.

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