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Do labor market institutions matter for business cycles?

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  • Gnocchi, Stefano
  • Lagerborg, Andresa
  • Pappa, Evi

Abstract

Using panel data of 19 OECD countries observed over 40 years and data on specific labor market reform episodes we conclude that labor market institutions matter for business cycle fluctuations. Spearman partial rank correlations reveal that more flexible institutions are associated with lower business cycle volatility. Turning to the analysis of reform episodes, wage bargaining reforms increase the correlation of the real wage with labor productivity and the volatility of unemployment. Employment protection reforms increase the volatility of employment and decrease the correlation of the real wage with labor productivity. Reforms reducing replacement rates make labor productivity more procyclical.

Suggested Citation

  • Gnocchi, Stefano & Lagerborg, Andresa & Pappa, Evi, 2015. "Do labor market institutions matter for business cycles?," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 299-317.
  • Handle: RePEc:eee:dyncon:v:51:y:2015:i:c:p:299-317
    DOI: 10.1016/j.jedc.2014.10.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Labor market institutions; Business cycles; Principal component analysis; Difference-in-difference regressions;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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