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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Paper provided by RAND Corporation Publications Department in its series Working Papers with number
511.
Find related papers by JEL classification: F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
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