Labor Market Institutions, Fiscal Multipliers, and Macroeconomic Volatility

64 Pages Posted: 24 May 2022

See all articles by Maximilian Böck

Maximilian Böck

Vienna School of International Studies

Jesus Crespo Cuaresma

Vienna University of Economics and Business

Christian Glocker

Austrian Institute of Economic Research (WIFO)

Date Written: 2022

Abstract

We study empirically how various labor market institutions – (i) union density, (ii) unemployment benefit remuneration, and (iii) employment protection – shape fiscal multipliers and output volatility. Our theoretical model highlights that more stringent labor market institutions attenuate both fiscal spending multipliers and macroeconomic volatility. This is validated empirically by an interacted panel vector autoregressive model estimated for 16 OECD countries. The strongest effects emanate from employment protection, followed by union density. While some labor market institutions mitigate the contemporaneous impact of shocks, they, however, reinforce their propagation mechanism. The main policy implication is that stringent labor market institutions render cyclical fiscal policies less relevant for macroeconomic stabilization.

Keywords: fiscal policy, fiscal multipliers, labor market institutions, interacted panel VAR

JEL Classification: E620, C330, J210, J380

Suggested Citation

Böck, Maximilian and Crespo Cuaresma, Jesus and Glocker, Christian, Labor Market Institutions, Fiscal Multipliers, and Macroeconomic Volatility (2022). CESifo Working Paper No. 9749, Available at SSRN: https://ssrn.com/abstract=4118083 or http://dx.doi.org/10.2139/ssrn.4118083

Maximilian Böck (Contact Author)

Vienna School of International Studies ( email )

Vienna
Austria

Jesus Crespo Cuaresma

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Christian Glocker

Austrian Institute of Economic Research (WIFO) ( email )

Arsenal, Objekt 20
Vienna, 1030
Austria

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