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

  • Thibault Darcillon

    ()

    (Axe Institutions - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

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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: https://halshs.archives-ouvertes.fr/halshs-00881198
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    1. Bruno Amable & Donatella Gatti & Jan Schumacher, 2006. "Welfare state retrenchment: The partisan effect revisited," PSE Working Papers halshs-00590537, HAL.
    2. 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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    4. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
    5. Stephanie Meinhard & Niklas Potrafke, 2012. "The Globalization–Welfare State Nexus Reconsidered," Review of International Economics, Wiley Blackwell, vol. 20(2), pages 271-287, 05.
    6. Breen, R. & Garcia-Penalosa, C., 1999. "Income Inequality and Macroeconomic Volatility: an Empirical Investigation," Economics Papers 1999-w20, Economics Group, Nuffield College, University of Oxford.
    7. Bertola, Giuseppe, 2007. "Finance and Welfare States in Globalizing Markets," CEPR Discussion Papers 6480, C.E.P.R. Discussion Papers.
    8. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2007. "Enhanced routines for instrumental variables/GMM estimation and testing," CERT Discussion Papers 0706, Centre for Economic Reform and Transformation, Heriot Watt University.
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    10. Marco Pagano & Giovanni Pica, 2011. "Finance and Employment," CSEF Working Papers 283, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    11. 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.
    12. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
    13. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November.
    14. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323, March.
    15. 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.
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