Labour Market Institutions and Unemployment: Does Finance Matter?

We explore whether finance influences the impact of labour market institutions on unemployment. Using a data set of 18 OECD countries over 1980–2004, we estimate a panel Vector AutoRegressive model. We check whether causalities from labour market variables to unemployment are affected by financial factors. In Belgium, Italy, Australia, Japan and Spain, accounting for financial indicators mitigates the benefits of labour market flexibility or makes it harmful to employment. In Austria, Canada, Finland and Portugal, it reduces its detrimental impact or makes it beneficial. In Ireland and Netherlands, both effects prevail, depending on the labour market indicator used.