Labor Market Performance in OECD Countries: The Role of Institutional Interdependencies

Reducing rigidity in labor markets is key to lowering unemployment. Theoretical models suggest that the impact of such reforms depends on the country-specific regulatory framework. We test this hypothesis by estimating the impact of changes in six categories of regulation conditional on the country-specific regulatory environment for 26 OECD countries. We overcome problems of modeling a large set of institutional interdependencies by applying a machine learning type model selection approach. We provide evidence for the existence of higher-order institutional interdependencies. We further document that especially for changes in employment protection and the unemployment benefit system the impact on unemployment is mixed across countries.

Sachs, Andreas and Frauke Schleer (2019), Labor Market Performance in OECD Countries: The Role of Institutional Interdependencies, International Economic Journal 33(3) , 431-454