Do labor market institutions matter for business cycles?∗ - European ...

4 LABOR MARKETS REFORMS AND BUSINESS CYCLES 16
4.3 Results
Table 10 presents the estimated values and standard errors for parameters α 1 and α 2 for
reforms that reduce employment protection and Figure 4 plots estimates for these parameters
for all the methods we have used to detrend the data. Countries that have passed such
reforms display a significant increase in the volatility of employment relative to countries that
have not introduced the reforms during the mid 80s and the beginning of the 90s. In addition,
in the countries where such reforms were passed the correlation of the real wage with labor
productivity has fallen significantly. All other statistics have not been significantly affected
by the introduction of EPL reforms (apart from the correlation of output and employment
when we detrend the data with the HP filter and the correlation of employment with labor
productivity when we log difference the data). The table and the figure also indicate that
the initial condition is often negative and significant, signalling strong regression to the mean
especially for the volatility of inflation and the real wage.
Table 11 presents the estimated values for α 1 and α 2 with bootstrap standard errors
in parenthesis and Figure 5 estimates of the same parameters using different detrending
methods for reforms that decreased non-employment benefits. Reforms that tightened the
eligibility conditions for unemployment benefits have significantly increased the volatility of
unemployment, labor productivity and output. However, this result is not robust since it
does not hold when we use growth rates to estimate (1). Non-employment benefit reforms
affect positively and significantly the correlation of output with employment when we use
growth rates or the BP filter to detrend the data. Yet, reforms to replacement rates change
significantly and robustly the correlation of output with labor productivity and inflation.
Labor productivity becomes more procyclical after such reforms, while the correlation of
output and inflation is reduced after such episodes. Again, for this wave of reforms the initial
conditions turn out to be very significant, suggesting that a change in cyclical volatility may
simply be the result of reversion to the average, rather than the effect of the reform in nonemployment
benefits for many statistics such as the volatility of inflation, the real wage,
employment and unemployment and the correlation of output with labor productivity.
In Table 12 and Figure 6 we present the estimates for reforms concerning changes in
the wage bargaining process. In accordance with some of the cross sectional results, wage
bargaining reforms have affected mostly the cyclical behavior of the real wage and labor
productivity. In particular, such reforms increased the correlation of the real wage with labor
productivity and the volatility of unemployment for both waves of reforms. The first wave of
reforms seems to have increased also significantly the correlation of output with employment
and with inflation. As for the previous cases, the initial condition for the volatility of the
real wage, unemployment and inflation matter. Hence, we find a general tendency of the
business cycle variability of these variables to decline independently of reforms.