Business cycle comovement and labor market institutions:An empirical investigation

Raquel Fonseca (), Lise Patureau () and Thepthida Sopraseuth

No 2008-05, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: This paper examines the impact of labor market institutions (LMI) on business cycle (BC) synchronization. We first develop a two-country right-to-manage model of wage bargaining. We find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. We then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. Our estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows to confront our results with those found in previous studies. Consistently with our theoretical results, we find that similar labor markets across countries tend to favor more their synchronized cycles. In particular, disparities in tax wedges yields lower GDP comovement. Besides, interactions between labor market institutions do matter, enhancing or dampening the effect of tax wedge divergence on BC synchronization. Our overall results suggest that the impact of distortions in demand-supply labor mechanism should be investigated in international business cycle models.

Keywords: International business cycle; Business cycle synchronization; Labor market institutions; Panel Data Estimation (search for similar items in EconPapers)
JEL-codes: C23 F42 J32 J52 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-lab and nep-opm
References: View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation (2010)
Working Paper: Business Cycle Comovement and Labor Market Institutions An Empirical Investigation (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2008-05

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