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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 impact of labor market institutions (LMI) on business cycle (BC) synchronization. The authors first develop a two-country right-to-manage model of wage bargaining. They find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. They then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. Their estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows to confront their results with those found in previous studies. Consistently with their theoretical results, they find that similar labor markets tend to favor more synchronized cycles. In particular, disparity in tax wedges yields lower GDP comovement. Besides, interactions between labor market institutions do matter, as they are found to affect the effect of tax wedge divergence on BC synchronization. Their 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 RAND Corporation Publications Department in its series Working Papers with number 511.

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Length: 35 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:ran:wpaper:511

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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. Baxter, Marianne & Kouparitsas, Michael A., 2005. "Determinants of business cycle comovement: a robust analysis," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 113-157, January.
  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. Alessia Campolmi & Ester Faia, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 619, European Central Bank.
  4. Richard Holt, 2004. "Exchange Rate Dynamics, Nominal Rigidities And Equilibrium Unemployment," Royal Economic Society Annual Conference 2004 47, Royal Economic Society.
  5. Julián Messina, 2004. "Institutions and service employment - a panel study for OECD countries," Working Paper Series 320, European Central Bank.
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Cited by:
  1. 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.
  2. Fabio Rumler & Johann Scharler, 2009. "Labor market institutions and macroeconomic volatility in a panel of OECD countries," Working Paper Series 1005, European Central Bank.
  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. Raquel Fonseca & Lise Patureau, 2008. "Divergence in Labor Market Institutions and International Business Cycles," Working Papers 562, RAND Corporation Publications Department.
  5. Stefano Gnocchi & Evi Pappa, 2009. "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.
  6. 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.
  7. 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.

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