Labor Market Institutions, Fiscal Multipliers, and Macroeconomic Volatility

Maximilian Boeck, Jesus Crespo Cuaresma and Christian Glocker

No 9749, CESifo Working Paper Series from CESifo

Abstract: We study empirically how various labor market institutions – (i) union density, (ii) unemployment benefit remuneration, and (iii) employment protection – shape fiscal multipliers and output volatility. Our theoretical model highlights that more stringent labor market institutions attenuate both fiscal spending multipliers and macroeconomic volatility. This is validated empirically by an interacted panel vector autoregressive model estimated for 16 OECD countries. The strongest effects emanate from employment protection, followed by union density. While some labor market institutions mitigate the contemporaneous impact of shocks, they, however, reinforce their propagation mechanism. The main policy implication is that stringent labor market institutions render cyclical fiscal policies less relevant for macroeconomic stabilization.

Keywords: fiscal policy; fiscal multipliers; labor market institutions; interacted panel VAR (search for similar items in EconPapers)
JEL-codes: C33 E62 J21 J38 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-lma and nep-mac
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Citations: View citations in EconPapers (1)

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