Fiscal Stimulus and Labor Market Flexibility

SAFE Working Paper No. 90

47 Pages Posted: 6 Mar 2015 Last revised: 12 Mar 2015

See all articles by Pinar Topal

Pinar Topal

Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: March 3, 2015

Abstract

This paper investigates whether a fiscal stimulus implies a different impact for flexible and rigid labour markets. The analysis is done for 11 advanced OECD economies. Using quarterly data from 1999 to 2013, I estimate a panel threshold structural VAR model in which regime switches are determined by OECD’s employment protection legislation index. My empirical results indicate significant differences between rigid and flexible labour markets regarding the impact of the fiscal stimulus on output and unemployment. While the impulse response of real GDP to a government spending shock is positive and more effective in flexible labour markets, it has less impact in the rigid ones. Moreover, it is found that a fiscal stimulus leads to higher overall unemployment in highly regulated countries.

Keywords: fiscal policy, labour economics, labour market policies, panel VAR, non-linear VAR, impulse response analysis

JEL Classification: E62, H30, J01, J08

Suggested Citation

Topal, Pinar, Fiscal Stimulus and Labor Market Flexibility (March 3, 2015). SAFE Working Paper No. 90. Available at SSRN: https://ssrn.com/abstract=2573758 or http://dx.doi.org/10.2139/ssrn.2573758

Pinar Topal (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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