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Institutions and unemployment: Do interactions matter?

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  • Sachs, Andreas

Abstract

Isolated effects of labor and product market institutions as well as the interaction between both aforementioned categories on unemployment have been extensively discussed in the empirical literature. However, interaction effects between individual labor market institutions have been widely neglected, mainly due to the infeasibility to correctly specify the model. In this paper, a model averaging approach is adopted to show that considering institutional interactions can improve the explanatory power of macroeconomic models explaining unemployment. The approach permits to tackle model specification problems directly related to the inclusion of a large number of interactions. Using a panel data set for 17 OECD countries from 1982 to 2005, 22 robust and significant interactions can be identified. Furthermore, country-specific marginal effects of institutional changes are calculated and their economic significance is analyzed for selected countries. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 11-057.

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Date of creation: 2011
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Handle: RePEc:zbw:zewdip:11057

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Keywords: Unemployment; Institutions; Labor and Product Markets; Model Averaging; Institutional Interactions; Institutional Design;

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Cited by:
  1. Andreas Sachs & Frauke Schleer, 2013. "Labour market performance in OECD countries: A comprehensive empirical modelling approach of institutional interdependencies," WWWforEurope Working Papers series 7, WWWforEurope.
  2. O'Higgins, Niall, 2012. "This Time It's Different? Youth Labour Markets During 'The Great Recession'," IZA Discussion Papers 6434, Institute for the Study of Labor (IZA).

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