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

More documents

Recommendations

Info

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.
5 IMPLICATIONS FOR THEORETICAL MODELS AND POLICYMAKING 17 5 Implications for theoretical models and policymaking To summarize, the results of the analysis of labour market reforms are very clear and robust. All reforms affect the cycle: employment protection reforms increase the volatility of employment and decrease the correlation of the real wage with labor productivity; wage bargaining reforms increase the volatility of unemployment and increase the correlation of the real wage with labor productivity; non-employment benefits reforms affect the correlation of output with labor productivity and inflation. These results have important implications for the development of macroeconomic models displaying labor market frictions and for labor market policies. The literature has modeled labor market frictions due to institutional features via business cycle models with rigidities due to firing or hiring costs, or real wage inflexibilities. Our analysis instead suggests that the way the wage bargaining process is set up has important implications for labor market dynamics. Gertler and Trigari (2009) have taken a first step in this direction and proposed the explicit modeling of the nature of the wage contracting process. They show that a more realistic modeling of the wage contract can account better than the standard search and matching model for the relatively volatile behavior of labor market activity over the business cycle. On the other hand, rigidities in the flow of workers are also important determinants of the labor market dynamics, since EPL changes affect significantly the flow of employment and the real wage in the data, but surprisingly have little effects on output and inflation. Our results solicit further theoretical work on the mechanism that renders labor market institutions unable to affect the short run dynamics of output and inflation. As far as labor market policies are concerned, to understand how the economy works it is important to model flow and wage restrictions. Reforms on flow and wage restrictions are not substitutes. The former affect employment and the latter mostly affect the volatility of real wages and unemployment. Moreover, they have opposite effects on the correlation between wages and labor productivity. In fact, reducing the importance of collective wage negotiations increases such correlation, while reducing employment protection reduces it. Finally, LMI should not be taken as exogenous as their dynamics may be related to the dynamics of macro variables and the probability that institutional changes take place may be related to the macroeconomic turbulence. Reforms appear to occur at times of economic turbulence and, especially, when the volatility of real wages, inflation and unemployment is high.
Page 1 and 2: Do labor market institutions matter
Page 3 and 4: 1 INTRODUCTION 3 a "flow restrictio
Page 6 and 7: 3 CROSS SECTIONAL EVIDENCE 6 and se
Page 8 and 9: 3 CROSS SECTIONAL EVIDENCE 8 3.2 Co
Page 10 and 11: 4 LABOR MARKETS REFORMS AND BUSINES
Page 18 and 19: 6 CONCLUSIONS 18 6 Conclusions This
Page 20 and 21: 7 REFERENCES 20 Gertler M. and A. T
Page 22 and 23: 8 TABLES AND FIGURES 22 8 Tables an
Page 24 and 25: 8 TABLES AND FIGURES 24 0.2 0 -0.2
Page 26 and 27: 8 TABLES AND FIGURES 26 0.6 EPL ref
Page 28 and 29: 8 TABLES AND FIGURES 28 0.7 WB1 ref
Page 30 and 31: 8 TABLES AND FIGURES 30 Table 2: Co
Page 32 and 33: 8 TABLES AND FIGURES 32 Table 5: Sp
Page 34 and 35: 8 TABLES AND FIGURES 34 Table 7b: C
Page 36 and 37: 8 TABLES AND FIGURES 36 Table 8: Tr

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

Create successful ePaper yourself

Delete template?

Save as template?