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A Bayesian approach to determine the impact of institutions on the unemployment rate

  • Sachs, Andreas

Labor and product market regulations affect the unemployment rate of a country without doubt. Econometricians, however, have yet to establish an unequivocal significance of this impact. Model mis-specification, one of the main underlying problems, is overcome by adopting a Bayesian Model Averaging approach. I apply this method to a panel data set that covers 17 OECD countries for the time period from 1982 to 2005 and for up to 20 potential explanatory variables. 8 institutional indicators are identified as significant determinants of unemployment. Endogeneity due to reverse causality is also considered by applying an instrumental variable estimation approach.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 10-058.

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Date of creation: 2010
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Handle: RePEc:zbw:zewdip:10058
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