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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
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Do Policies that Reduce Unemployment Raise its Volatility?
Evidence from OECD Countries
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- Alain de Serres1, Fabrice Murtin1
- Author Affiliations
- 1: OECD, France
- 30 jan 2013
- Bibliographic information
In this paper we examine whether past labour market reforms aiming at reducing the rate of unemployment have raised its long-run volatility. Using non-linear panel data models applied to 24 OECD countries between 1985 and 2007, as well as Monte-Carlo techniques, we do not find any evidence of such policy trade-off. In contrast, we find that reduced unemployment benefit duration, more competition-inducing product market regulation and looser employment protection legislation are associated with a weaker persistence of unemployment over time, which implies a lower volatility of unemployment in the long run. More specifically, the evidence suggests that even in the case of reforms that may have raised the shortterm sensitivity of unemployment to business cycles (such as with the easing of employment protection), the weaker persistence effect dominates the higher cyclical volatility, implying a net reduction in long-term volatility.
- labour market institutions, business cycle, unemployment persistence, unemployment
- Classification JEL:
- E24: Macroeconomics and Monetary Economics / Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy / 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
- J21: Labor and Demographic Economics / Demand and Supply of Labor / Labor Force and Employment, Size, and Structure