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Business cycle comovement and labor market institutions:An empirical investigation

Author

Listed:
  • 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)

Abstract

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 comovement. 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.

Suggested Citation

  • Raquel Fonseca & Lise Patureau & Thepthida Sopraseuth, 2008. "Business cycle comovement and labor market institutions:An empirical investigation," THEMA Working Papers 2008-05, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  • Handle: RePEc:ema:worpap:2008-05
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    References listed on IDEAS

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    1. Michèle Belot & Jan C. van Ours, 2004. "Does the recent success of some OECD countries in lowering their unemployment rates lie in the clever design of their labor market reforms?," Oxford Economic Papers, Oxford University Press, vol. 56(4), pages 621-642, October.
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    3. 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.
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    7. Faia, Ester & Campolmi, Alessia, 2006. "Cyclical inflation divergence and different labor market institutions in the EMU," Working Paper Series 619, European Central Bank.
    8. Juan C. Botero & Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "The Regulation of Labor," The Quarterly Journal of Economics, Oxford University Press, pages 1339-1382.
    9. Julián Messina, 2005. "Institutions and Service Employment: A Panel Study for OECD Countries," LABOUR, CEIS, vol. 19(2), pages 343-372, June.
    10. Richard Holt, 2004. "Exchange Rate Dynamics, Nominal Rigidities And Equilibrium Unemployment," Royal Economic Society Annual Conference 2004 47, Royal Economic Society.
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    Citations

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    Cited by:

    1. 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.
    2. Hasan Engin Duran & Alexandra Ferreira-Lopes, 2017. "Determinants of co-movement and of lead and lag behavior of business cycles in the Eurozone," International Review of Applied Economics, Taylor & Francis Journals, pages 255-282.
    3. Michael J. Artis & Jarko Fidrmuc & Johann Scharler, 2008. "The transmission of business cycles," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(3), pages 559-582, July.
    4. Fabio Rumler & Johann Scharler, 2011. "Labor Market Institutions And Macroeconomic Volatility In A Panel Of Oecd Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(3), pages 396-413, July.
    5. Raquel Fonseca & Lise Patureau & Thepthida Sopraseuth, 2009. "Divergence in Labor Market Institutions and International Business Cycles," Annals of Economics and Statistics, GENES, issue 95-96, pages 279-314.
    6. Jarko Fidrmuc & Neil Foster & Johann Scharler, 2007. "Labour Market Rigidities, Financial Integration and International Risk Sharing in the OECD," CESifo Working Paper Series 2028, CESifo Group Munich.
    7. Sumru Altug & Fabio Canova, 2014. "Do Institutions and Culture Matter for Business Cycles?," Open Economies Review, Springer, pages 93-122.
    8. J.-S. Pentecôte & J.-C. Poutineau & F. Rondeau, 2015. "Trade Integration and Business Cycle Synchronization in the EMU: The Negative Effect of New Trade Flows," Open Economies Review, Springer, pages 61-79.
    9. Vadim Kufenko & Niels Geiger, 2016. "Business cycles in the economy and in economics: an econometric analysis," Scientometrics, Springer;Akadémiai Kiadó, pages 43-69.
    10. Stefano Gnocchi & Evi Pappa, "undated". "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.
    11. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.
    12. Faccini, Renato & Rosazza Bondibene, Chiara, 2012. "Labour market institutions and unemployment volatility: evidence from OECD countries," Bank of England working papers 461, Bank of England.
    13. Fidrmuc, Jarko & Foster, Neil & Scharler, Johann, 2011. "Labour market rigidities and international risk sharing across OECD countries," Journal of International Money and Finance, Elsevier, vol. 30(4), pages 660-677, June.
    14. repec:spr:jbuscr:v:13:y:2017:i:2:d:10.1007_s41549-017-0018-5 is not listed on IDEAS
    15. Cook, David & Xu, Juanyi, 2015. "Eurosclerosis and international business cycles," Journal of International Economics, Elsevier, pages 54-67.

    More about this item

    Keywords

    International business cycle; Business cycle synchronization; Labor market institutions; Panel Data Estimation;

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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