Fiscal adjustments: do labor and product market institutions matter?

This paper investigates the role played by labor and product market institutions in determining the likelihood of initiating and of successfully concluding a fiscal adjustment. Using data for 16 OECD countries over the period 1970 to 2000, we find that a less generous unemployment benefit system—rather than temporary caps on spending (e.g., wage freezes)—contributes to the success of fiscal consolidation. Weaker forms of bargaining coordination and centralization facilitate the fiscal adjustment effort. On the other hand, product market deregulation and more flexible employment protection legislation do not contribute positively to fiscal consolidation.