Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation

35 Pages Posted: 5 Sep 2007

See all articles by Raquel Fonseca

Raquel Fonseca

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG); Rand Corporation; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Lise Patureau

University of Cergy-Pontoise - Department of Economics

Thepthida Sopraseuth

Université du Maine; University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Date Written: July 2007

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. 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

JEL Classification: F42, C23, J32, J52

Suggested Citation

Fonseca Benito, Raquel and Patureau, Lise and Sopraseuth, Thepthida, Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation (July 2007). RAND Working Paper Series No. WR-511. Available at SSRN: https://ssrn.com/abstract=1010248 or http://dx.doi.org/10.2139/ssrn.1010248

Raquel Fonseca Benito (Contact Author)

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG) ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada

Rand Corporation ( email )

P.O. Box 2138
1776 Main Street
Santa Monica, CA 90407-2138
United States

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Lise Patureau

University of Cergy-Pontoise - Department of Economics ( email )

Site des Chênes 1
33 boulevard du Port
Cergy-Pontoise, Cédex F-95011
France

Thepthida Sopraseuth

Université du Maine ( email )

72085 Le Mans Cedex 9
France

University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France

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