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Business Cycle Comovement and Labor Market Institutions An Empirical Investigation

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  • Raquel Fonseca Benito
  • Lise Patureau
  • Thepthida Sopraseuth

Abstract

This paper examines the impact of labor market institutions (LMI) on business cycle (BC) synchronization. The authors first develop a two-country right-to-manage model of wage bargaining. They find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. They then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. Their estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows to confront their results with those found in previous studies. Consistently with their theoretical results, they find that similar labor markets tend to favor more synchronized cycles. In particular, disparity in tax wedges yields lower GDP comovement. Besides, interactions between labor market institutions do matter, as they are found to affect the effect of tax wedge divergence on BC synchronization. Their 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 Benito & Lise Patureau & Thepthida Sopraseuth, 2007. "Business Cycle Comovement and Labor Market Institutions An Empirical Investigation," Working Papers 511, RAND Corporation.
  • Handle: RePEc:ran:wpaper:511
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Philip Du Caju & Catherine Fuss & Ladislav Wintr, 2009. "Understanding sectoral differences in downward real wage rigidity : workforce composition, institutions, technology and competition," Working Paper Research 156, National Bank of Belgium.
    2. 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.
    3. Paul Heaton, 2008. "Childhood Educational Disruption and Later Life Outcomes: Evidence from Prince Edward County," Journal of Human Capital, University of Chicago Press, vol. 2(2), pages 154-187.
    4. Sumru Altug & Fabio Canova, 2014. "Do Institutions and Culture Matter for Business Cycles?," Open Economies Review, Springer, pages 93-122.
    5. Stefano Gnocchi & Evi Pappa, "undated". "Do labor market rigidities matter for business cycles? Yes they do," Working Papers 411, Barcelona Graduate School of Economics.
    6. repec:spr:jbuscr:v:13:y:2017:i:2:d:10.1007_s41549-017-0018-5 is not listed on IDEAS
    7. repec:taf:irapec:v:31:y:2017:i:2:p:255-282 is not listed on IDEAS
    8. Cook, David & Xu, Juanyi, 2015. "Eurosclerosis and international business cycles," Journal of International Economics, Elsevier, pages 54-67.
    9. 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.
    10. Fabrice Barthélémy & Jean-Luc Prigent, 2009. "Optimal Time to Sell in Real Estate Portfolio Management," The Journal of Real Estate Finance and Economics, Springer, pages 59-87.
    11. Vadim Kufenko & Niels Geiger, 2016. "Business cycles in the economy and in economics: an econometric analysis," Scientometrics, Springer;Akadémiai Kiadó, pages 43-69.
    12. Douglas Sutherland & Peter Hoeller, 2013. "Growth-promoting Policies and Macroeconomic Stability," OECD Economics Department Working Papers 1091, OECD Publishing.
    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, pages 660-677.
    14. 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, pages 396-413.
    15. Gnocchi, Stefano & Lagerborg, Andresa & Pappa, Evi, 2015. "Do labor market institutions matter for business cycles?," Journal of Economic Dynamics and Control, Elsevier, pages 299-317.
    16. Michael J. Artis & Jarko Fidrmuc & Johann Scharler, 2008. "The transmission of business cycles," The Economics of Transition, The European Bank for Reconstruction and Development, pages 559-582.
    17. 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.
    18. 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.
    19. Raquel Fonseca & Lise Patureau & Thepthida Sopraseuth, 2009. "Divergence in Labor Market Institutions and International Business Cycles," Annals of Economics and Statistics, GENES, pages 279-314.
    20. Fabio RUMLER & Johann SCHARLER, "undated". "Labor Market Institutions and Macroeconomic Volatility in a Panel of OECD Countries," EcoMod2008 23800120, EcoMod.

    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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