The Role of Labor Market Institutions on Wage and Inflation Dynamics: Empirical Evidence from OECD Economies

Abstract

This paper investigates empirically how labor market institutions affect wage and inflation dynamics, particularly the volatility of real wage growth and inflation and the persistence in inflation using a panel data for OECD economies. I also look at how the rate of unemployment is affected by the larger set of labor market variables that captures diverse aspects of the labor market. The main finding of the paper is that benefit replacement rate is the most significant variable in explaining the volatility of real wage growth and inflation. Besides that union density and bargaining coordination also play an important role in explaining the volatilities in these variables. These results for the benefit replacement rate and union density also support the findings of the theoretical models. However, it is seen that labor market institutions do not have a significant influence on inflation persistence. It is also shown that the labor market institutions have a considerable influence on the level of unemployment as higher levels of benefit replacement rate, longer durations of unemployment benefits, and a higher union density are expected to lead to a higher level of unemployment.