Unemployment, institutions, and reform complementarities: re-assessing the aggregate evidence for OECD countries

Abstract

There is no or limited consensus on the quantitative impact of institutions on unemployment, which has led some to question the case for structural reforms. Recent studies suggest also that institutions interact with each other and cannot be analysed in isolation. In this paper, we estimate a standard reduced-form model to explore the institutional determinants of unemployment and assess its robustness using a large battery of robustness checks. We show that, although the impact of each individual policy varies across countries due to policy interactions, the simple linear model can be used to draw inferences for countries with an average mix of institutions. The model is then extended to encompass systemic interactions, in which individual policies interact with the overall institutional framework. We find relatively robust evidence of broad reform complementarities.

Employment protection legislation in Croatia

“…Furthermore, the employer is required to notify not only the employee but also the workers' council of his/her intention to terminate an em 1 For more information, see the IMF website at: http://www.imf.org/external/country/HRV/index.htm; IMF Staff visit reports on Article IV Consultations, Croatia. 2 For more details, see: OECD (2013) and (2013a). 3 For more details, see: World Bank (2014).…”

Labour Market Performance in OECD Countries: A Comprehensive Empirical Modelling Approach of Institutional Interdependencies

“…Similar empirical approaches, albeit with a different and limited sets of bivariate interactions, are chosen by Nickell et al (2005) and Baccaro and Rei (2007). Bassanini and Duval (2009) apply a more comprehensive approach. They emphasize that subjectively selecting some interactions can result in considerably biased estimates due to an omitted variable bias caused by the exclusion of further potentially relevant interactions.…”

“…Instead of constructing interaction terms between individual institutions, Bassanini and Duval (2009) further analyse the interaction between a particular institution and the countryspecific institutional framework as a whole. This is done by estimating a specification where the latter is defined by the sum of direct unemployment effects of institutions.…”

“…Furthermore, Sachs (2011) does not find a general tendency towards complementary institutions. Therefore, we see the approach of Bassanini and Duval (2009) as a first step we can build on by applying a more structural approach.…”

Labor market reforms and unemployment dynamics

“…Specifically, if we use series of unemployment stocks and flows, and vacancies, as labor market variables, it will be difficult to identify more than three separate channels for policy intervention. 1 The model builds on Mortensen and Pissarides (1994, henceforth MP). Yet, it is immune to Shimer's (2005) critique.…”