Business Cycle Comovement And Labor Market Institutions

This paper examines the impact of Labor Market Institutions (LMI) on Business Cycle (BC) synchronization. The authors first develop a two-country right-to-manage model of wage bargaining. They find that, following a symmetric demand change, cross-country differences in LMI generate divergent responses in employment and output. They then investigate the empirical relevance of this result using panel data of 20 OECD countries observed over 40 years. The estimation strategy controls for a large set of possible factors influencing GDP correlations, which allows confronting the results with those found in previous studies. Consistently with the theoretical results, they find that similar labor markets tend to favor more synchronized cycles. In particular, disparity in tax wedges yields lowers GDP co-movement.