Business Cycle Comovement and Labor Market Institutions An Empirical Investigation

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

No WR-511, Working Papers from RAND Corporation

Abstract: This paper examines the impact of labor market institutions (LMI) on business cycle (BC) synchronization. The authors first develop a two-country right-to-manage model of wage bargaining. They find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. They then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. Their estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows to confront their results with those found in previous studies. Consistently with their theoretical results, they find that similar labor markets tend to favor more synchronized cycles. In particular, disparity in tax wedges yields lower GDP comovement. Besides, interactions between labor market institutions do matter, as they are found to affect the effect of tax wedge divergence on BC synchronization. Their 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)
Pages: 35 pages
Date: 2007-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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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 (2008)
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