WHY THERE IS DEBATE OVER LABOR MARKET INSTITUTIONS: A PERSPECTIVE ON LONG-TERM UNEMPLOYMENT RATE

This paper tests economic impacts of labor market institutions on employment of OECD nations from the perspective of long-term unemployment rate (LUR) in order to alleviate endogeneity bias existed in the current literature on this topic, which is the root of the long-lasting debate over significance of these effects. Based on careful analysis of the model specifications of past literature, a set of models with dependent variable of LUR are subject to various robustness tests and compared with other models in literature, policy simulation is then conducted based on the best specification after these tests. We find that some institutions, particularly tax wedge, union density and their interaction do affect LUR, which has profound implication for institutions’ impacts on standard unemployment rate and provide further evidence in support of deregulation view held by IMF.