Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation

17 Pages Posted: 1 Nov 2010

See all articles by Raquel Fonseca

Raquel Fonseca

RAND Corporation

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)

Abstract

This paper examines the empirical link between labor market institutions and international business cycle synchronization. Using a data panel of 20 OECD countries over the 1964–2003 period, we evaluate how cross-country labor market heterogeneity affects business cycle comovement. Our estimation strategy controls for a large set of possible factors influencing cross-country GDP correlation, which allows a comparison of our results with those found in previous studies. We find that bilateral trade, trade similarity, monetary and fiscal convergence, as well as EMU membership lead to more synchronized cycles. Our results show that labor market regulations affect the extent of business cycle synchronization. Disparities in employment protection laws and direct taxation tend to lower international comovement while divergence in union density, unemployment benefits, and indirect taxation enhance cross-country correlations. The level of labor market regulations also matters. Heavier employment taxes are found to raise GDP comovement.

Suggested Citation

Fonseca, Raquel and Patureau, Lise and Sopraseuth, Thepthida, Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation. Review of International Economics, Vol. 18, Issue 5, pp. 865-881, November 2010. Available at SSRN: https://ssrn.com/abstract=1699940 or http://dx.doi.org/10.1111/j.1467-9396.2010.00913.x

Raquel Fonseca

RAND Corporation ( email )

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

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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