Unemployment, Labour Market Institutions, Fiscal Imbalances and credit Constraints: New Evidence on an Active Debate

What is it about?

Using a sample of 20 OECD countries from 1970 to 2013 and accounting for cross-sectional and temporal dependence in the regressions’ disturbances, the paper examines the combined influence of labour market institutions, fiscal imbalances and credit constraints on unemployment. We demonstrate that unemployment exhibits high persistence. It is also closely associated with business cycle fluctuations, albeit mostly in economies under adjustment programmes (Spain, Ireland, Italy and Portugal). Evidence on the association between labour and product market institutions and unemployment remains inconclusive. The effect of large fiscal consolidation episodes on unemployment is consistently positive and significant, especially during the crisis period (2008–13) and in countries with strict employment protection regulation. High growth rates of GDP that reflect economic activity rebound, may partly neutralize the positive and significant impact of fiscal consolidation on unemployment.

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