New Working Paper by Maximilian Boeck, Jesus Crespo Cuaresma and Christian Glocker
A new working paper examines how labor market institutions shape fiscal multipliers and output volatility. Is there a trade-off between structural and cyclical policies?
New research by Maximilian Boeck, Jesus Crespo Cuaresma and Christian Glocker is now available as CESifo working paper entitled 'Labor market institutions, fiscal multipliers, and macroeconomic volatility'.
In this study, the authors study both empirically and theoretically how various labor market institutions - (i) union density, (ii) unemployment benefit remuneration, and (iii) employment protection - shape fiscal multipliers and output volatility. The 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 contemporaneous impact of 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.