Fiscal Stimulus and Labor Market Flexibility
SAFE Working Paper No. 90
47 Pages Posted: 6 Mar 2015 Last revised: 12 Mar 2015
Date Written: March 3, 2015
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
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