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Reassessing the Role of Labor Market Institutions for the Business Cycle

Author

Listed:
  • Mirko Abbritti

    (University of Navarra)

  • Sebastian Weber

    (International Monetary Fund)

Abstract

This paper investigates empirically the effect of labor market institutions (LMIs) on business cycle fluctuations. Most studies, using a cross-country panel approach, have found a weak effect of LMIs on unemployment and, especially, inflation dynamics. In this paper, we estimate an interacted panel VAR for OECD countries, where we allow the dynamics of inflation, unemployment, and the interest rate to vary with the characteristics of the labor market. We find that LMIs have a large and significant effect on both unemployment and inflation dynamics. Stricter employment protection legislation and higher union density mute the reaction of unemployment but increase the response of inflation to external shocks. The opposite effects are found for the generosity of the unemployment benefit system and the extent of the tax wedge. Countries with decentralized wage bargaining manage to absorb shocks through lower variations in unemployment. Our results imply that countries with very rigid or very flexible labor markets can have similar inflation and unemployment dynamics.

Suggested Citation

  • Mirko Abbritti & Sebastian Weber, 2018. "Reassessing the Role of Labor Market Institutions for the Business Cycle," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 1-34, January.
    • Handle: RePEc:ijc:ijcjou:y:2018:q:0:a:1
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    Cited by:

    1. Abbritti, Mirko & Consolo, Agostino, 2022. "Labour market skills, endogenous productivity and business cycles," Working Paper Series 2651, European Central Bank.
    2. Antonio Ribba, 2020. "Is the unemployment–inflation trade‐off still alive in the Euro Area and its member countries? It seems so," The World Economy, Wiley Blackwell, vol. 43(9), pages 2393-2410, September.
    3. Tafuro, Andrea, 2023. "Labour market rigidity and expansionary austerity," Journal of Macroeconomics, Elsevier, vol. 75(C).
    4. Kolasa, Marcin & Rubaszek, Michał & Walerych, Małgorzata, 2021. "Do flexible working hours amplify or stabilize unemployment fluctuations?," European Economic Review, Elsevier, vol. 131(C).
    5. Leroy, Aurélien & Pop, Adrian, 2019. "Macro-financial linkages: The role of the institutional framework," Journal of International Money and Finance, Elsevier, vol. 92(C), pages 75-97.
    6. Josué Diwambuena & Raquel Fonseca & Stefan Schubert, 2023. "Labor Market Institutions, Productivity, and the Business Cycle: An Application to Italy," Cahiers de recherche / Working Papers 2302, Chaire de recherche sur les enjeux économiques intergénérationnels / Research Chair in Intergenerational Economics.
    7. Arno Hantzsche & Simon Savsek & Sebastian Weber, 2018. "Labour Market Adjustments to Financing Conditions under Sectoral Rigidities in the Euro Area," Open Economies Review, Springer, vol. 29(4), pages 769-794, September.
    8. Jiménez, Alvaro & Rodríguez, Gabriel & Ataurima Arellano, Miguel, 2023. "Time-varying impact of fiscal shocks over GDP growth in Peru: An empirical application using hybrid TVP-VAR-SV models," Structural Change and Economic Dynamics, Elsevier, vol. 64(C), pages 314-332.
    9. Holger Gorg & Cecilia Hornok & Catia Montagna & George E. Onwordi, 2020. "Employment to output elasticities and reforms towards flexicurity: Evidence from OECD Countries," Discussion Papers 2020-24, University of Nottingham, GEP.
    10. Dąbrowski, Marek A. & Papież, Monika & Rubaszek, Michał & Śmiech, Sławomir, 2022. "The role of economic development for the effect of oil market shocks on oil-exporting countries. Evidence from the interacted panel VAR model," Energy Economics, Elsevier, vol. 110(C).
    11. repec:zbw:bofrdp:2019_024 is not listed on IDEAS
    12. Antonio Ribba, 2022. "Monetary Policy Shocks in Open Economies and the Inflation Unemployment Trade-Off: The Case of the Euro Area," JRFM, MDPI, vol. 15(4), pages 1-12, March.
    13. Oscar Bajo-Rubio & Burcu Berke, 2023. "Revisiting the effects of government size and labour market institutions on macroeconomic volatility: the case of the eurozone," Economics and Business Letters, Oviedo University Press, vol. 12(1), pages 91-96.
    14. Hjortsoe, Ida & Weale, Martin & Wieladek, Tomasz, 2018. "How does financial liberalisation affect the influence of monetary policy on the current account?," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 93-123.

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