Labor Market Flexibility and the Impact of the Financial Crisis

Abstract

The impact of the global financial crisis varies across countries. We examine whether cross-country differences in output loss and speed of recovery are affected by differences in labor market flexibility. By employing cross-country regressions and including control variables like trade and capital market integration, fiscal balance, financial vulnerability, and institutional differences, we find that lower hiring costs reduce the output loss, notably so in high-income countries. However, the duration of the crisis is longer in case of low dismissal costs, notably so in low-income countries.