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What Causes Labor-Market Volatility? The Role of Finance and Welfare State Institutions

  • Thibault Darcillon

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

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    Using fixed effects panel data models on a sample of 15 OECD countries over the period 1970-2007, this article explores the linkages between labor-market volatility, financial development and welfare state institutions. We analyze the interacted impact of financial development on the one hand and welfare state institutions (i.e., overall social spending) on the other hand on volatility of hours worked and volatility of wages. Our results indicate that financial development is associated with higher volatility on labor-markets. Estimates of the marginal effects show that overall social spending increasingly reduces labor-market volatility with the degree of financial development, and more specifically for low-skilled workers through compensation mechanisms. Finally, we control for potential reversed causality by running IV-GMM estimations suggesting that increasing financial development has not threatened the governments' ability to play an active role in cushioning fluctuations on labor markets.

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    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00881198.

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    Date of creation: Oct 2013
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    Handle: RePEc:hal:cesptp:halshs-00881198
    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00881198
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    1. Stephanie Meinhard & Niklas Potrafke, 2011. "The Globalization-welfare State Nexus Reconsidered," Working Paper Series of the Department of Economics, University of Konstanz 2011-27, Department of Economics, University of Konstanz.
    2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    3. Arjun Jayadev, 2007. "Capital account openness and the labour share of income," Cambridge Journal of Economics, Oxford University Press, vol. 31(3), pages 423-443, May.
    4. Bertola, Giuseppe, 2007. "Finance and welfare states in globalizing markets," CFS Working Paper Series 2007/31, Center for Financial Studies (CFS).
    5. Marco Pagano & Giovanni Pica, 2012. "Finance and employment," Economic Policy, CEPR;CES;MSH, vol. 27(69), pages 5-55, 01.
    6. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    7. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323, March.
    8. repec:hal:journl:halshs-00768908 is not listed on IDEAS
    9. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/GMM estimation and testing," Boston College Working Papers in Economics 667, Boston College Department of Economics, revised 05 Sep 2007.
    10. repec:hal:journl:halshs-00716859 is not listed on IDEAS
    11. Breen, R. & Garcia-Penalosa, C., 1999. "Income Inequality and Macroeconomic Volatility: an Empirical Investigation," G.R.E.Q.A.M. 99b11, Universite Aix-Marseille III.
    12. Bruno Amable & Donatella Gatti & Jan Schumacher, 2006. "Welfare-State Retrenchment: The Partisan Effect Revisited," Oxford Review of Economic Policy, Oxford University Press, vol. 22(3), pages 426-444, Autumn.
    13. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November.
    14. Adeline Saillard, 2012. "The role of complementarity and the financial liberalization in the financial crisis," Documents de travail du Centre d'Economie de la Sorbonne 12038, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    15. Carmignani, Fabrizio & Colombo, Emilio & Tirelli, Patrizio, 2011. "Macroeconomic risk and the (de)stabilising role of government size," European Journal of Political Economy, Elsevier, vol. 27(4), pages 781-790.
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