Labor Market Institutions, Fiscal Multipliers, and Macroeconomic Volatility

Maximilian Böck, Jesus Crespo Cuaresma, Christian Glocker

Publication: Working/Discussion Paper

Abstract

We study empirically how various labor market institutions – (i) union density, (ii) unemployment benefit remuneration, and (iii) employment protection – shape fiscal multipliers and macroeconomic 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 size or frequency of exogenous 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.
Original languageEnglish
Publication statusPublished - 2022

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502025 Econometrics
  • 502018 Macroeconomics

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