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Labour market institutions and economic cycles

8th National Competition for Economic Research Grants

Macroeconomics

Senior Researcher : Evi Pappa

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Research Centre or Institution : Universidad Autónoma de Barcelona.

Abstract

This project studies how the characteristics of the labour market affect the economic cycles for a sample of 19 OECD countries. The objective is to take advantage of both the variations in the indices of the labour institutions among countries and the variation in those indices over time. Specific reforms of the labour market are also observed.

The analysis reveals that trade union coverage significantly affects the cycle statistics, in particular GDP volatility. In addition, it shows that the incorporation of (a) an endogenous decision to participate among workers and (b) the presence of short- and long-term unemployed into a Neo-Keynesian model makes it possible to reproduce the evidence, as indicated by structural VARs, according to which fiscal stimuli increase labour participation, employment and real wages. This is an important contribution, given the problems of the standard theories to explain that evidence. Finally, the effects of monetary policy on the rate of unemployment are studied in a Neo-Keynesian model with an endogenous decision to participate in the labour market.

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