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Labour market transitions, shocks and institutions in turbulent times: a cross-country analysis

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Abstract

This paper analyses the impact of the business cycle on labour market dynamics in EU member states and the US during the first decade of the 21st century. Using unique measures of labour market flows constructed from worker-level micro data, we examine to what extent macro shocks were transmitted to national labour markets. We apply the approach by Blanchard and Wolfers (Econ J 110(462):1–33, 2000) to analyse the role of the interaction of macroeconomic shocks and labour market institutions for worker transitions in order to explain cross-country differences in labour market reactions in a period including the Great Recession. Our results suggest a significant influence of trade unions in channelling macroeconomic shocks. Specifically, union density moderates these impacts over the business cycle, i.e. countries with stronger trade unions experience weaker reactions of the unemployment rate and of worker transitions.

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Fig. 1

Source: EU-LFS, CPS, ICTWSS, own calculation

Fig. 2

Source: EU-LFS, CPS, own calculation

Fig. 3

Source: EU-LFS, CPS, own calculation

Fig. 4

Source: EU-LFS, CPS, ICTWSS, own calculation

Notes

  1. 1.

    Note that this methodology does not yield causal effects. The word “effect” should therefore be broadly interpreted in the following.

  2. 2.

    The analysis of the evolution of unemployment by Bertola (2017) also includes the time period of the Great Recession.

  3. 3.

    The countries are Austria, Belgium, Czech Republic, Germany, Denmark, Estonia, Spain, Finland, France, Greece, Hungary, Italy, Luxembourg, Norway, Poland, Portugal, Sweden, Slovenia, Slovak Republic and the United Kingdom.

  4. 4.

    This means that a person is defined as employed if he or she performed some work for wage/salary or for profit or family gain, or—if temporarily not at work—had a formal attachment to his or her job or was with an enterprise; and as unemployed if he or she was without work, currently available for work, and seeking work (ILO 1988).

  5. 5.

    Alternative measures of the business cycle are for example the output gap, the real interest rate and total factor productivity growth, which we apply in robustness tests (see Sect. 5.2).

  6. 6.

    See e.g. Burda and Hunt (2011) and Burda and Weder (2016) for an analysis of the German experience during the Great Recession.

  7. 7.

    The institutional measures are the replacement rate of unemployment benefits and their length, employment protection legislation, union coverage, union density, the level of wage bargaining, active labour market policies and the tax wedge.

  8. 8.

    See the appendix B for a detailed description of the shocks and institutions variables, as well as the respective data sources.

  9. 9.

    The findings are robust to using differences in unemployment levels instead of the unemployment level as dependent variable (results available from the authors upon request).

  10. 10.

    Additionally, we include the share of short-time workers and hours worked in the benchmark regression. The findings remain robust to these alterations (results available from the authors upon request).

  11. 11.

    This means that in equation 1, we use \(Y_{it}*X^j_{it}*D_{it}\) instead of \(Y_{it}*X^j_{it}\), where \(D_{it}\) takes the value 1 in case of a recession, and 0 otherwise, or the reverse in case of an economic boom. A recession is defined as a negative or zero yearly GDP growth rate. Accordingly, an economic boom is defined by a positive GDP growth rate.

  12. 12.

    Table A.4 in the online appendix displays the estimates of the benchmark model using annual data. The results are very similar compared to applying three-year windows.

  13. 13.

    This is also the case when conducting this robustness test for the inflow into inactivity for young workers only (results available from the authors upon request).

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Correspondence to Ronald Bachmann.

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We thank Thomas K. Bauer, Daniel Baumgarten, Giuseppe Bertola, Romain Duval, Hanna Frings, Matthias Giesecke, Philipp Jäger, Lisa Leschnig, Pedro S. Martins, Christian Merkl, Battista Severgnini as well as participants of the 30th Annual Congress of the European Economic Association, the IZA/OECD Employment Seminar, the World Bank DIME seminar, the “Conference in honor of Christopher A. Pissarides” at SciencesPo, Paris, the FAU/IAB-Seminar Macroeconomics and Labor Markets in Nürnberg, the 9th RGS Doctoral Conference in Economics, the 21st SMYE, the Jahrestagung of the Verein für Socialpolitik 2016 and seminars at RWI for helpful comments and suggestions. We are grateful to Fernanda Martinez Flores for excellent research assistance.

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Bachmann, R., Felder, R. Labour market transitions, shocks and institutions in turbulent times: a cross-country analysis. Empirica (2020). https://doi.org/10.1007/s10663-019-09469-y

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Keywords

  • Worker flows
  • Labour market dynamics
  • Institutions
  • Great recession

Mathematics Subject Classification

  • J6
  • E24
  • E32