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Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation

  • Raquel Fonseca
  • Lise Patureau
  • Thepthida Sopraseuth

This paper examines the empirical link between labor market institutions and international business cycle synchronization. Using a data panel of 20 OECD countries over the 1964-2003 period, we evaluate how cross-country labor market heterogeneity affects business cycle comovement. Our estimation strategy controls for a large set of possible factors influencing cross-country GDP correlation, which allows a comparison of our results with those found in previous studies. We find that bilateral trade, trade similarity, monetary and fiscal convergence, as well as EMU membership lead to more synchronized cycles. Our results show that labor market regulations affect the extent of business cycle synchronization. Disparities in employment protection laws and direct taxation tend to lower international comovement while divergence in union density, unemployment benefits, and indirect taxation enhance cross-country correlations. The level of labor market regulations also matters. Heavier employment taxes are found to raise GDP comovement. Copyright � 2010 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 18 (2010)
Issue (Month): 5 (November)
Pages: 865-881

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Handle: RePEc:bla:reviec:v:18:y:2010:i:5:p:865-881
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  1. Messina, Julián, 2004. "Institutions and service employment: a panel study for OECD countries," Working Paper Series 0320, European Central Bank.
  2. Canova, Fabio & Dellas, Harris, 1993. "Trade interdependence and the international business cycle," Journal of International Economics, Elsevier, vol. 34(1-2), pages 23-47, February.
  3. Darvas, Zsolt & Rose, Andrew K & Szapáry, György, 2005. "Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic," CEPR Discussion Papers 5188, C.E.P.R. Discussion Papers.
  4. 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 Reforms?," CEPR Discussion Papers 2492, C.E.P.R. Discussion Papers.
  5. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
  6. Marianne Baxter & Michael A. Kouparitsas, 2004. "Determinants of Business Cycle Comovement: A Robust Analysis," NBER Working Papers 10725, National Bureau of Economic Research, Inc.
  7. Richard Holt, 2004. "Exchange Rate Dynamics, Nominal Rigidities And Equilibrium Unemployment," Royal Economic Society Annual Conference 2004 47, Royal Economic Society.
  8. Campolmi, Alessia & Faia, Ester, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 0619, European Central Bank.
  9. 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.
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