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Labour market rigidities and international risk sharing across OECD countries

  • Fidrmuc, Jarko
  • Foster, Neil
  • Scharler, Johann

In this paper we examine the role of labour market rigidities in the context of international consumption risk sharing. Stronger labour market regulation may make it easier to borrow against future income, thus allowing shocks to be smoothed to a greater extent. In addition, rigid labour markets may help to enforce implicit contracts that shift risk from employees to owners of firms, who, in turn, may diversify risk internationally. Using data for 19 OECD countries we show that labour market rigidities significantly increase consumption correlations and reduce the exposure to country-specific shocks. These results suggest that labour market rigidities improve the international sharing of consumption risks by fostering a more efficient intra-national allocation of risk.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 4 (June)
Pages: 660-677

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:4:p:660-677
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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