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Divergence in Labor Market Institutions and International Business Cycles
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Divergence in Labor Market Institutions and International Business Cycles

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  • Raquel Fonseca Benito
  • Lise Patureau
  • Thepthida Sopraseuth

Abstract

This paper investigates the sources of business cycle comovement within the New Open Economy Macroeconomy framework. It sheds new light on the business cycle comovement issue by examining the role of cross-country divergence in labor market institutions. The authors first document stylized facts supporting that heterogeneous labor market institutions are associated with lower cross-country GDP correlations among OECD countries. They then investigate this fact within a two-country dynamic general equilibrium model with frictions on the good and labor markets. On the good-market side, they model monopolistic competition and nominal price rigidity. Labor market frictions are introduced through a matching function à la Mortensen and Pissarides (1999). Their conclusions disclose that heterogenous labor market institutions amplify the crosscountry GDP differential in response to aggregate shocks. In quantitative terms, they contribute to reduce cross-country output correlation, when the model is subject to real and/or monetary shocks. Their overall results show that taking into account labor market heterogeneity improves their understanding of the quantity puzzle.

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  • Raquel Fonseca Benito & Lise Patureau & Thepthida Sopraseuth, 2008. "Divergence in Labor Market Institutions and International Business Cycles," Working Papers WR-562, RAND Corporation.
    • Handle: RePEc:ran:wpaper:wr-562
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    Cited by:

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    3. Claudia Busl & Atilim Seymen, 2013. "(Spillover) Effects of Labour Market Reforms in Germany and France. WWWforEurope Working Paper No. 8," WIFO Studies, WIFO, number 46855.
    4. Josué Diwambuena & Raquel Fonseca & Stefan Schubert, 2023. "Labor Market Institutions, Productivity, and the Business Cycle: An Application to Italy," Cahiers de recherche / Working Papers 2302, Chaire de recherche sur les enjeux économiques intergénérationnels / Research Chair in Intergenerational Economics.
    5. Gnocchi, Stefano & Lagerborg, Andresa & Pappa, Evi, 2015. "Do labor market institutions matter for business cycles?," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 299-317.
    6. Patureau, Lise, 2012. "Labor market frictions and the international propagation mechanism," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 199-222.

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    More about this item

    Keywords

    International business cycle; labor market institutions; wage bargaining;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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