This paper aims to investigate the determinants of OECD unemployment from 1960 to 1995 with a special focus on labour market institutions. We want to know if the evolution of OECD unemployment can be accounted for by changes in labour market institutions, and by the interactions of institutions and macroeconomic shocks. Our findings suggest that labour market institutions have a direct significant impact on unemployment in a fashion that is broadly consistent with their impact on real labour costs.
Broad movements in unemployment across the OECD can be explained by shifts in labour market institutions, although this explanation relies on high levels of endogenous persistence.
We also identify a significant role for institutions through their interaction with adverse macroeconomic shocks, although the estimates do not appear extremely robust in this case. In contrast, the direct effect of institutions still holds when we include the possibility of interactions between shocks and institutions.