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Labour market institutions and unemployment volatility: evidence from OECD countries

Author

Listed:
  • Faccini, Renato

    (Queen Mary, University of London)

  • Rosazza Bondibene, Chiara

    (NIESR and Royal Holloway, University of London)

Abstract
Using publicly available data for a group of 20 OECD countries, we find that the cyclical volatility of the unemployment rate exhibits substantial cross-country and time variation. We then investigate empirically whether labour market institutions can account for this observed heterogeneity and find that the impact of various institutions on cyclical unemployment dynamics is quantitatively strong and statistically significant. The hypothesis that labour market institutions could increase the volatility of unemployment by reducing match surplus is not supported by the data. In fact, unemployment benefits, taxation and employment protection appear to reduce the volatility of unemployment rates. In addition, we find that the precise nature of union bargaining has important implications for cyclical unemployment dynamics, with union coverage and density having large and offsetting effects. Finally, we provide evidence suggesting that interactions between shocks and institutions matter for cyclical unemployment fluctuations. However, institutions only account for about one quarter of the explained variation, which implies that they are important but they are not the entire story.

Suggested Citation

  • Faccini, Renato & Rosazza Bondibene, Chiara, 2012. "Labour market institutions and unemployment volatility: evidence from OECD countries," Bank of England working papers 461, Bank of England.
    • Handle: RePEc:boe:boeewp:0461
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    2. Görg, Holger & Hornok, Cecília & Montagna, Catia & Onwordi, George E., 2018. "Employment to Output Elasticities & Reforms towards Flexicurity: Evidence from OECD Countries," IZA Discussion Papers 12004, Institute of Labor Economics (IZA).
    3. Matsue, Toyoki, 2019. "Employment fluctuations in a dynamic model with long-term and short-term contracts," MPRA Paper 97545, University Library of Munich, Germany.
    4. Giovanna Vallanti, 2018. "International capital mobility and unemployment dynamics: Empirical evidence from OECD countries," The World Economy, Wiley Blackwell, vol. 41(11), pages 3130-3171, November.
    5. Holger Gorg & Cecilia Hornok & Catia Montagna & George E. Onwordi, 2020. "Employment to output elasticities and reforms towards flexicurity: Evidence from OECD Countries," Discussion Papers 2020-24, University of Nottingham, GEP.
    6. Matsue Toyoki, 2019. "Labour Market Institutions and Amplification of Employment Fluctuations," Central European Economic Journal, Sciendo, vol. 6(53), pages 164-173, January.
    7. Christoph S. Weber, 2020. "The unemployment effect of central bank transparency," Empirical Economics, Springer, vol. 59(6), pages 2947-2975, December.
    8. Lochner Benjamin, 2024. "Employment Protection in Dual Labor Markets: Any Amplification of Macroeconomic Shocks?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 24(1), pages 249-304, January.
    9. Toyoki Matue, 2017. "Labor Market Institutions and Employment Fluctuations in Dynamic General Equilibrium Models," Discussion Papers 1701, Graduate School of Economics, Kobe University.
    10. Matthias S. Hertweck & Oliver Sigrist, 2012. "The Aggregate Effects of the Hartz Reforms in Germany," Working Paper Series of the Department of Economics, University of Konstanz 2012-38, Department of Economics, University of Konstanz.
    11. Jan Bruha & Jiri Polansky, 2015. "Empirical Analysis of Labor Markets over Business Cycles: An International Comparison," Working Papers 2015/15, Czech National Bank.
    12. Robert Jump, 2014. "A Fair Wage Explanation of Labour Market Volatility," Studies in Economics 1413, School of Economics, University of Kent.
    13. Oscar Bajo-Rubio & Burcu Berke, 2023. "Revisiting the effects of government size and labour market institutions on macroeconomic volatility: the case of the eurozone," Economics and Business Letters, Oviedo University Press, vol. 12(1), pages 91-96.

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    More about this item

    Keywords

    Labour market institutions; labour market fluctuations;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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