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Fiscal multipliers and job-protection regulation

Matteo Cacciatore (), Romain Duval (), Davide Furceri () and Aleksandra Zdzienicka

European Economic Review, 2021, vol. 132, issue C

Abstract: We study, both theoretically and empirically, how labor market regulation affects fiscal multipliers. We focus on the stringency of employment protection legislation, a prominent source of rigidity in European labor markets. First, using a small-open economy model that features labor-market search-and-matching frictions and nominal rigidities, we show that an increase in government spending has larger output effects when firing costs are lower. The importance of layoff costs for the public spending multiplier is larger in the absence of exchange rate adjustment and in a recession. Second, we confirm these findings empirically using a panel of 26 advanced countries over the period 1970–2013. The effect of job protection on fiscal multipliers is both statistically and economically significant.

Keywords: Employment protection; Fiscal multipliers; Structural reforms; Local projections (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 F41 J64 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.euroecorev.2020.103616

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