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

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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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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2013/13070.pdf
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    Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 13070.

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    Length: 26 pages
    Date of creation: Oct 2013
    Date of revision:
    Handle: RePEc:mse:cesdoc:13070
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    1. 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.
    2. Amable, Bruno & Gatti, Donatella & Schumacher, Jan, 2006. "Welfare State Retrenchment: The Partisan Effect Revisited," IZA Discussion Papers 1995, Institute for the Study of Labor (IZA).
    3. Bertola, Giuseppe, 2007. "Finance and Welfare States in Globalizing Markets," CEPR Discussion Papers 6480, C.E.P.R. Discussion Papers.
    4. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, number 9780198293323, March.
    5. Marco Pagano & Giovanni Pica, 2011. "Finance and Employment," CSEF Working Papers 283, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    6. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
    7. 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.
    8. 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.
    9. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004," The Institute for International Integration Studies Discussion Paper Series iiisdp126, IIIS.
    10. Meinhard, S. & Potrafke, Niklas, 2012. "The Globalization-Welfare State Nexus Reconsidered," Munich Reprints in Economics 19212, University of Munich, Department of Economics.
    11. repec:hal:journl:halshs-00716859 is not listed on IDEAS
    12. 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.
    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.
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