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Divergence in Labor Market Institutions and International Business Cycles

  • Raquel FONSECA
  • Lise PATUREAU
  • Thepthida SOPRASEUTH

The paper investigates the international GDP synchronization within the international real business cycle framework (Backus, Kehoe and Kydland, 1992). It sheds new light on the comovement issue by highlighting the role of cross-country divergence in labor market institutions (LMIs). We first document the empirical link between labor market heterogeneity and GDP comovement in a sample of 15 OECD countries over the recent period. Labor market heterogeneity significantly reduces cross-country GDP correlation. Besides, the effects are non-trivial, as they are found to depend on the design of LMIs. We then investigate this stylized fact within the two-country RBC model with labor-market frictions à la Pissarides (1990), that we amend to take into account asymmetric LMIs. The model rationalizes the link between labor market heterogeneity and GDP comovement observed in the data. Our results show that taking into account the design of LMIs among OECD countries improves our understanding of their business cycle comovement.

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Article provided by ENSAE in its journal Annals of Economics and Statistics.

Volume (Year): (2009)
Issue (Month): 95-96 ()
Pages: 279-314

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Handle: RePEc:adr:anecst:y:2009:i:95-96:p:14
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