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Mr. Lorenzo E. Bernal-Verdugo, Davide Furceri, and Mr. Dominique M. Guillaume
The aim of this paper is to analyze the relationship between labor market flexibility and unemployment outcomes. Using a panel of 97 countries from 1985 to 2008, the results of the paper suggest that improvements in labor market flexibility have a statistically and significant negative impact on unemployment outcomes (over unemployment, youth unemployment and long-term unemployment). Among the different labor market flexibility indicators analyzed, hiring and firing regulations and hiring costs are found to have the strongest effect.
Mr. Lorenzo E. Bernal-Verdugo, Davide Furceri, and Mr. Dominique M. Guillaume

flexibility (see Feldman 2009 and Bernal-Verdugo et al., 2011 for a similar approach). This is important given the inherently complex nature of labor market regulation and the evidence that improvements in labor market efficiency are likely to require reforms in more than one area of the labor market ( Bassanini and Duval, 2009 ). Third, the paper analyzes the dynamic effect of labor market institutions on unemployment outcomes, controlling also for possible endogeneity and reverse causality from unemployment to labor market institutions. Indeed, as shown by previous

Mr. Lorenzo E. Bernal-Verdugo, Davide Furceri, and Mr. Dominique M. Guillaume

of Labor Market Flexibility on Unemployment 10. The Dynamic Effect of Labor Market Flexibility on Different Unemployment Outcomes 11. The Dynamic Effect of Labor Market Flexibility on Different Unemployment Outcomes

International Monetary Fund

unemployment outcomes, several authors have argued that coordination allows internalizing the adverse effects of wage increases on the overall price level and the competitiveness of the economy (See Belot and van Ours (2001) , Nickell (1997) Nickell et al (2001) ). 2 The relative small size of the country and a relative homogenous work force may also be helpful in enabling coordination, since a country with large productivity dispersion across regions is unlikely to generate low aggregate unemployment, when applying identical wage rates. 14. The taxes on labor have

Davide Furceri, Mr. Lorenzo E. Bernal-Verdugo, and Mr. Dominique M. Guillaume
Using a sample of 97 countries spanning the period 1980?2008, we estimate that financial crises have a large negative impact on unemployment in the short term, but that this effect rapidly disappears in the medium term in countries with flexible labor market institutions, whereas the impact of financial crises is less pronounced but more persistent in countries with more rigid labor market institutions. These effects are even larger for youth unemployment in the short term and long-term unemployment in the medium term. Conversely, large upfront, or gradual but significant, comprehensive labor market policies have a positive impact on unemployment, albeit only in the medium term.