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Business cycle comovement and labor market institutions: An empirical investigation

  • Raquel Fonseca

    ()

    (RAND 1776 Main Street P.O. Box 2138 Santa Monica, CA 90407-2138, USA)

  • Lise Patureau

    ()

    (THEMA, Université de Cergy-Pontoise Site des Chênes 1 UFR d’Économie et Gestion 33, boulevard du Port 95011 Cergy-Pontoise Cedex, France)

  • Thepthida Sopraseuth

    ()

    (EPEE, CEPREMAP and PSE Jourdan, Departement d’Economie, Univ. d’Evry, 4 Bd F. Mitterand, 91025 Evry Cedex, France)

This paper examines the impact of labor market institutions (LMI) on business cycle (BC) synchronization. We first develop a two-country right-to-manage model of wage bargaining. We find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. We then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. Our estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows to confront our results with those found in previous studies. Consistently with our theoretical results, we find that similar labor markets across countries tend to favor more their synchronized cycles. In particular, disparities in tax wedges yields lower GDP co movement. Besides, interactions between labor market institutions do matter, enhancing or dampening the effect of tax wedge divergence on BC synchronization. Our overall results suggest that the impact of distortions in demand-supply labor mechanism should be investigated in international business cycle models.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-05.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-05
Contact details of provider: Postal: 33, boulevard du port - 95011 Cergy-Pontoise Cedex
Phone: 33 1 34 25 60 63
Fax: 33 1 34 25 62 33
Web page: http://thema.u-cergy.fr
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  1. Julián Messina, 2005. "Institutions and Service Employment: A Panel Study for OECD Countries ," LABOUR, CEIS, vol. 19(2), pages 343-372, 06.
  2. Richard Holt, 2004. "Exchange Rate Dynamics, Nominal Rigidities And Equilibrium Unemployment," Royal Economic Society Annual Conference 2004 47, Royal Economic Society.
  3. 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.
  4. Zsolt Darvas & Andrew K. Rose & György Szapáry, 2005. "Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic," NBER Working Papers 11580, National Bureau of Economic Research, Inc.
  5. Baxter, Marianne & Kouparitsas, Michael A., 2005. "Determinants of business cycle comovement: a robust analysis," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 113-157, January.
  6. Campolmi, Alessia & Faia, Ester, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 0619, European Central Bank.
  7. Alan C. Stockman, 1987. "Sectoral and National Aggregate Disturbances to Industrial Output in Seven European Countries," NBER Working Papers 2313, National Bureau of Economic Research, Inc.
  8. 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.
  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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