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Labor market policies in high- and low-interest rate environments: Evidence from the euro area

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  • Lastauskas, Povilas
  • Stakėnas, Julius

Abstract

Do labor market policies initiated in periods of loose monetary policy yield different outcomes from those introduced when monetary tightening prevails? Using data from 11 euro-area members up to 2010 – and extending to 17 countries up to 2020 – we analyze three labor market policies: replacement rates, spending on active labor market policies (ALMPs), and employment protection. We find that these policies deliver different macroeconomic outcomes in low- and high-interest rate environments. In particular, ALMPs reduce unemployment if implemented under a loose monetary policy but not otherwise, whereas higher employment protection delivers expansionary effects under a tight monetary policy. These findings highlight that the effectiveness of labor market policies is significantly influenced by the monetary policy environment, emphasizing the need for coordinated policy design. Methodologically, we contribute by proposing to average local projections using Mallow’s Cp criterion, allowing for inferences that are robust to mis-specification and accommodate non-linearities.

Suggested Citation

  • Lastauskas, Povilas & Stakėnas, Julius, 2024. "Labor market policies in high- and low-interest rate environments: Evidence from the euro area," Economic Modelling, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:ecmode:v:141:y:2024:i:c:s026499932400275x
    DOI: 10.1016/j.econmod.2024.106918
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    Keywords

    Labor market policies; Non-linear responses; Mallow’s Cp criterion; Average local projections; Low and high interest rate environments;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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