The interaction of shocks and institutions during the Great Recession

Abstract:

The Great Recession has had a very strong impact on labour markets. This paper focuses on one important aspect in this context, i.e. potential determinants of cross-country differences in the reaction of labour markets in Europe and the US to the crisis. Following Blanchard and Wolfers (2000), we focus on the role of the interaction of shocks and institutions in this context. This yields insights into the importance of differences in exposure to macroeconomic shocks, in institutional differences between countries, and in the way that macroeconomic shocks were transmitted to national labour markets through their institutional framework. In our analysis, we consider both stocks (employment, unemployment) and flows before and during the recession, which we construct from micro data at the worker level. Examining flows in particular provides a detailed picture of the mechanisms underlying the evolution of employment and unemployment stocks. Our (preliminary) results indicate that the interaction of shocks and institutions can explain cross-national differences to an extent, with trade unions playing a particularly prominent role.

Development Impact Evaluation (DIME) is a global program hosted in the World Bank's Development Research Group. Its purpose is to increase the use of impact evaluation in the design and implementation of public policy and increase institutional capacity and motivation for evidence-based policy. 

Last Updated: May 08, 2015