Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation |
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| Authors: | Raquel Fonseca Lise Patureau Thepthida Sopraseuth |
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| Institution: | 1. RAND and Université du Québec à Montréal (UQAM), Département des sciences économiques Case postale 8888, Succ. Centre‐Ville Montréal, (Québec) Canada H3C 3P8;2. THEMA, Université de Cergy‐Pontoise, Site des Chênes 1, 33, boulevard du Port 95011 Cergy‐Pontoise Cedex, France;3. GAINS‐TEPP, CEPREMAP, and Université du Maine, Faculté de Droit et Sciences Economiques, Avenue Olivier Messiaen, 72085 Le Mans Cedex 09, France;4. We thank two anonymous referees, as well as Jan Van Ours and Philippe Andrade for helpful comments. We are grateful to Dennis Quinn and Julian Messina for sharing their data on capital account restrictions and service employment share, respectively. We thank audiences at EEA 2006 and LACEA‐LAMES 2006, and participants at the THEMA seminar for helpful remarks. Omissions and mistakes are ours. |
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| 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. |
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