## _wp1265

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---

### I. Introduction — objectives and core findings
- Research objectives:
  - Systematically measure the impact of financial crises on general, long-term, and youth unemployment in 140 countries.
  - Analyze the magnitude and persistence of increases in unemployment resulting from financial crises.
  - Examine how labor institutional and regulatory frameworks modulate the unemployment response to financial crises.
- Core findings:
  - Flexibility of labor markets affects both the magnitude and persistence of the impact of financial crises on unemployment.
  - Large-scale changes in labor market institutions can reduce unemployment by the same amount that financial crises increased it, albeit only after several years.
  - Change in labor market institutions are less likely to occur in more centralized political regimes.
  - Labor market policies may reduce unemployment over the medium term, but must be properly designed to improve employment quality and minimize possible negative short-term effects on inequality and job destruction (these short-term effects are not investigated here).

### II. Data and descriptive statistics
- Coverage and sources:
  - Panel of 97 countries from 1980 to 2008.
  - Labor market flexibility measures from Fraser Institute’s Economic Freedom of the World (EFW) database (Gwartney and Lawson, 2010).
  - Other sources: IMF WEO, World Bank WDI, Penn World Table version 7.0, Laeven and Valencia (2010), Keefer (2010).
- Labor market flexibility indicators:
  - Composite measure plus six policy-area indicators: (i) minimum wage (M), (ii) hiring and firing regulation (H), (iii) centralized collective wage bargaining (C), (iv) mandated cost of hiring (MCH), (v) mandated cost of work dismissal (MCW), and (vi) conscription (CO).
  - All indicators standardized on a 0–10 scale, with higher values representing a more flexible labor market.
- Selected descriptive statistics:
  - Composite labor market flexibility indicator: Obs. 1,214; Min 1.8; Max 9.5.
  - Unemployment concentrated among young people (aged between 15 and 24).
  - Correlations between unemployment outcomes and labor market flexibility indicators are mostly negative and statistically significant; hiring costs and youth unemployment show the strongest negative correlation.

### III. Role of labor market flexibility — descriptive evidence
- Short-term vs. medium-term pattern:
  - Short-term: More flexible labor markets have a higher increase in unemployment immediately following a financial crisis, reflecting higher elasticity of unemployment to output.
  - Medium-term: Cumulative changes in unemployment following a financial crisis show a negative relation with the composite labor market flexibility indicator, indicating greater resilience in more flexible labor markets.
- Regression illustrations:
  - Medium-term (U(t+6)-U(t)): U(t+6)-U(t) = 6.403 -1.632L  (t-statistics: (1.70)   (-2.50)**)
  - Short-term (U(t+1)-U(t)): U(t+1)-U(t) = -1.423 +0.419L  (t-statistics: (-1.34) +(2.19)**)
  - Note: ** denote significance at 5 percent.

### IV. Impact of financial crises on unemployment — methodology and main results
- Estimation approach:
  - Dynamic impulse response functions (IRFs) estimated directly following Jordà (2005) and Teulings and Zubanov (2010).
  - For each year k following a downturn, the coefficient β_k measures the impact of the crisis on the change in unemployment; β_k estimated for k = 0, 1,...,6.
  - Reverse causality addressed by estimating changes in unemployment in the years that follow a financial crisis.
- Main results (summary):
  - A statistically significant and long-lasting increase in the unemployment rate following the occurrence of a financial crisis, increasing the rate of unemployment by about 1 percent at the peak—three years after the occurrence of the crisis (text truncates in source).
  - Additional evidence from other cited work:
    - Financial crises increase overall unemployment by about 0.5–1 percent in OECD evidence (Furceri and Mourougane (2009)).
    - Financial crises increase structural unemployment by about ¾ percentage point (Guichard and Rusticelli (2010)).
  - Peak effect on youth unemployment: increase of 2 percent, occurring one year after the crisis; effect over the medium term is statistically insignificant.
  - Long-term unemployment: effect is extremely persistent, becomes statistically significant only two years after the crisis, and over the medium term (six years after the crisis) long-term unemployment stabilizes at a level 6 percentage points higher than the pre-crisis level.

### V. Labor market flexibility and crisis response — quantified effects
- Augmented regression with interactions (Crisis × L):
  - Short-term: An increase of one point in the labor market flexibility composite indicator increases the short-term effect of crises on unemployment by 0.4 percentage point.
  - Medium-term: The same one-point increase reduces the medium-term impact by about 0.6 percentage point.
- Sub-indicators with largest medium-term impact:
  - Hiring and firing regulations (H) and centralized collective bargaining (C) show the strongest medium-term moderating effects.
- Robustness:
  - Results qualitatively similar for youth and long-term unemployment.
  - Restricting the sample to countries with complete data for each period k yields qualitatively unchanged results.

### VI. Labor market policies — identification and medium-term effects
- Identification of large-scale reforms:
  - Large change defined when annual change in the composite labor market flexibility indicator exceeds by two standard deviations the average annual change; identification carried out during 2000–08.
  - Episodes identified: 48 episodes of large-scale labor market reforms mostly occurring during the past decade.
- Dynamic impact (IRFs for k = 0,...,6):
  - It takes, on average, about six years before effects of labor market reforms on unemployment materialize.
  - Estimated medium-term effect (OLS): Large-scale changes in labor market policies are associated with a decrease in unemployment of about ¾ percent over the medium term.
- Disaggregated outcomes (OLS estimates, Reform t):
  - Unemployment (L): -0.740 (-3.05)***
  - Youth unemployment (L): -1.908 (-3.64)***
  - Long-term unemployment (L): -0.621 (-0.54) [statistically insignificant]
  - Sub-indicators (selected, Reform t):
    - M (minimum wage): Unemployment -0.844 (-4.07)***; Youth unemployment -1.983 (-4.64)***.
    - MCH (mandated cost of hiring): Unemployment -0.900 (-5.52)***; Youth unemployment -1.921 (-4.53)***.
    - H (hiring/firing regulation): Long-term unemployment -7.283 (-4.02)***.
    - CO (conscription): Long-term unemployment -6.225 (-1.88)*.
- Policy implication: Reforms lowering hiring costs and reducing rigidity in hiring and firing regulation may have large and significant impact on unemployment outcomes, particularly for youth.

### VII. Endogeneity, instruments, and decomposition
- Endogeneity concern:
  - OLS estimates of reform effects may be biased towards zero if worsening economic conditions increase probability of change and the true β_k is negative.
- Two identification strategies:
  1. Instrument equation using variables significantly correlated with probability of changes in labor market institutions (from Probit results).
  2. Decompose reform effect into anticipated (predicted probability) and unanticipated (residual) components.
- Determinants of reforms (Probit findings):
  - Higher pre-existing level of labor market institutions index reduces probability of change.
  - Favorable economic situation (gap_growth) decreases probability of change.
  - Lagged unemployment rates do not seem to affect probability of large-scale changes.
  - Political factors: greater decentralization (system) increases probability of changes; length of time the chief executive’s party has been in power (prtyin) reduces probability of change.
- IV results (Table 6):
  - IV estimates suggest larger medium-term effects than OLS.
  - Example IV magnitudes (Policy t): (I): -2.478 (-4.76)***; (III): -1.991 (-3.92)***; (VII): -1.879 (-3.84)***.
  - IV estimates suggest labor market policies may lead to a reduction in unemployment of about 2.5 percentage points over the medium term (larger than OLS baseline).
- Anticipated vs. non-anticipated effects (Table 7):
  - Anticipated policy effects (examples): -3.795 (-2.26)**; -3.652 (-2.31)**.
  - Non-anticipated policy effects (examples): -0.721 (-2.90)***; -0.710 (-2.83)***.
  - The anticipated effect is considerably larger than the unpredicted component; the unanticipated coefficient remains statistically significant and its magnitude is close to the baseline regression estimate.

### VIII. Gradual changes in labor market institutions
- Alternative specification:
  - Replace reform dummy with change in the labor market flexibility indicator (ΔLM).
- OLS estimate:
  - An increase of one point in the labor market flexibility indicator decreases unemployment by about 0.5 percent over the medium term.
- IV estimates for gradual changes:
  - Instrumenting changes in the composite indicator with variables correlated with probability of reforms yields larger estimated effects than OLS.

### IX. Robustness checks
- Re-estimations including time fixed effects, regional fixed effects, and country-specific time trends produce results that remain statistically significant and broadly unchanged.
- Restricting samples to countries with complete data for each period k yields qualitatively unchanged results.

### X. Conclusions and policy messages
- Crisis effects by flexibility:
  - In countries with more flexible labor markets, the impact of financial crises is sharper but short-lived.
  - In countries with more rigid labor markets, the effect of financial crises is initially more subdued, but highly persistent.
- Group-specific effects:
  - More pronounced for youth unemployment in the short term; long-term unemployment exhibits strong persistence (hysteresis) with stabilization at 6 percentage points higher six years after a crisis.
- Labor market policy guidance:
  - Some evidence that large upfront, or gradual but significant comprehensive labor market policies may reduce unemployment in the medium term.
  - Positive impact of labor market policies is particularly pronounced for the young.
  - Adoption of reforms less likely in centralized political regimes and when institutions are already flexible and economic conditions relatively good.
  - Design considerations: employment protection should internalize social costs and avoid inhibiting job creation and labor reallocation; couple unemployment benefits with activation measures; avoid artificial restrictions on individual employment contracts.

### XI. Key statistics and tables (selected)
- Labor market outcomes (Table 1):
  - Unemployment: Obs. 2826; Mean 8.9; Std. Dev. 5.9; Min 0.0; Max 37.3
  - Long-term unemployment: Obs. 984; Mean 33.8; Std. Dev. 18.3; Min 0.5; Max 84.9
  - Youth unemployment: Obs. 1669; Mean 17.6; Std. Dev. 10.5; Min 0.7; Max 70.9
- Labor market flexibility (Table 1):
  - Composite index: Obs. 1214; Mean 5.9; Std. Dev. 1.5; Min 1.8; Max 9.5
  - Minimum wage: Obs. 1135; Mean 6.2; Std. Dev. 2.7; Min 0.0; Max 10.0
  - Hiring and firing regulations: Obs. 1056; Mean 4.7; Std. Dev. 1.5; Min 1.0; Max 8.8
  - Centralized collective bargaining: Obs. 1124; Mean 6.4; Std. Dev. 1.5; Min 1.8; Max 9.5
  - Mandated cost of hiring: Obs. 1166; Mean 6.9; Std. Dev. 2.0; Min 1.9; Max 10.0
  - Mandated cost of worker dismissal: Obs. 927; Mean 5.8; Std. Dev. 3.1; Min 0.0; Max 10.0
  - Conscription: Obs. 1656; Mean 5.9; Std. Dev. 4.3; Min 0.0; Max 10.0
- Selected correlations (Table 2):
  - U and YU: 0.51***
  - U and LU: 0.90***
  - YU and LU: 0.56***
  - L with U: -0.11***; L with YU: -0.22***; L with LU: -0.13***
- Selected regression coefficients (Table 3, initial and medium-term effects):
  - Crisis (initial): examples include 1.314 (4.43)***; 1.392 (4.86)***; 2.116 (6.04)
  - Crisis*Flexibility (initial): 0.395 (2.26)** (example)
  - Crisis (medium term): examples include -1.110 (-3.12)*** (statistically significant)
  - Crisis*Flexibility (medium term): -0.564 (-2.14)** (example)
- Medium-term effect robustness (Table 6, IV):
  - Policy t examples: -2.478 (-4.76)***; -1.991 (-3.92)***; -1.879 (-3.84)***

*Source: _wp1265 - References .............................................................................................................*

### References .............................................................................................................

### _wp1265 - References .............................................................................................................

### I. INTRODUCTION
- The 2008 financial crisis resulted in a significant and persistent increase in unemployment in advanced economies; youth unemployment also increased (or stopped declining) at least temporarily in several regions, including Latin America, the Middle East, and North Africa.
- Financial crises increase unemployment mainly through:
  - decline in output and investment associated with heightened uncertainty, higher risk premia (Pindyck, 1991; Pindyck and Solimano, 1993), and tighter lending standards (Hall, 2009);
  - hysteresis effects related to the loss of attractiveness of the unemployed, which can increase long-term and structural unemployment (Ball, 2009);
  - greater risk for more vulnerable groups such as the youth and women with limited professional experience, whose participation rate typically declines (Duval et al., 2011).
- Research objectives and scope:
  - Systematically measure the impact of financial crises on general, long-term, and youth unemployment in 140 countries.
  - Analyze the magnitude and persistence of increases in unemployment resulting from financial crises.
  - Examine how labor institutional and regulatory frameworks modulate the unemployment response to financial crises.
- Key findings summarized:
  - Flexibility of labor markets affects both the magnitude and persistence of the impact of financial crises on unemployment.
  - Large-scale changes in labor market institutions can reduce unemployment by the same amount that financial crises increased it, albeit only after several years.
  - Change in labor market institutions are less likely to occur in more centralized political regimes.
  - Labor market policies may play an important role in reducing unemployment over the medium term, but must be properly designed to improve employment quality and minimize possible negative short-term effects on inequality and job destruction (these short-term effects are not investigated here).

### II. DATA AND DESCRIPTIVE STATISTICS
- Data coverage:
  - Panel of 97 countries from 1980 to 2008.
- Labor market flexibility measures:
  - Source: Fraser Institute’s Economic Freedom of the World (EFW) database (Gwartney and Lawson, 2010).
  - Composite measure plus six policy-area indicators: (i) minimum wage (M), (ii) hiring and firing regulation (H), (iii) centralized collective wage bargaining (C), (iv) mandated cost of hiring (MCH), (v) mandated cost of work dismissal (MCW), and (vi) conscription (CO).
  - All indicators standardized on a 0–10 scale, with higher values representing a more flexible labor market.
- Other data sources:
  - IMF’s World Economic Outlook (WEO), World Bank’s World Development Indicators (WDI), Penn World Table version 7.0 (Heston et al., 2011), Laeven and Valencia (2010) on financial crisis occurrences, Keefer (2010) on political institutions.
- Descriptive statistics and correlations:
  - For the composite labor market flexibility indicator: total of 1,214 observations, minimum 1.8, maximum 9.5.
  - Unemployment is mostly concentrated among young people (aged between 15 and 24).
  - Correlations between unemployment outcomes and labor market flexibility indicators are in most cases negative and statistically significant, with hiring costs and youth unemployment having the strongest negative correlation.

### III. THE ROLE OF LABOR MARKET FLEXIBILITY (Descriptive evidence)
- Short-term vs. medium-term patterns (Figure 2 description):
  - Short-term: Economies with more flexible labor markets have a higher increase in unemployment immediately following a financial crisis, reflecting higher elasticity of unemployment to output.
  - Medium-term: The cumulative changes in unemployment following a financial crisis show a negative relation with the composite labor market flexibility indicator, suggesting that labor market resilience to financial crises is a positive function of labor market flexibility.
- Empirical illustration (regression lines shown in Figure 2):
  - Medium-term (U(t+6)-U(t)): U(t+6)-U(t) = 6.403 -1.632L  (t-statistics: (1.70)   (-2.50)**)
  - Short-term (U(t+1)-U(t)): U(t+1)-U(t) = -1.423 +0.419L  (t-statistics: (-1.34) +(2.19)**)
  - Note: ** denote significance at 5 percent.

### IV. THE IMPACT OF FINANCIAL CRISES ON UNEMPLOYMENT
- Methodology:
  - Dynamic impact estimated following Jorda (2005) and Teulings and Zubanov (2010), estimating impulse response functions (IRFs) directly.
  - For each year k following the onset of the downturn, the estimation equation:
    - Variables and structure described in the source (includes country fixed effects α_i, lagged changes in unemployment with coefficients γ_j, downturn dummy P_i,t with coefficients β_k, and vector of control variables X_i,t).
    - β_k measures the impact of the crisis on the change in unemployment for each future period k.
  - IRFs obtained by least-squares dummy variable estimation of β_k for k = 0, 1,...,6.
  - Reverse causality addressed by estimating changes in unemployment in the years that follow a financial crisis.
  - Advantages over ARDL: avoids sensitivity to choice of lags, avoids imposing permanent effects, confidence bands computed from standard deviations of estimated β_k.
- Results (summary available in source up to the point provided):
  - Figure 3 (description begins): a statistically significant and long-lasting increase in the unemployment rate following the occurrence of a financial crisis, increasing the rate of unemployment by about 1 percent at the peak—three years after the occurrence of the crisis—(text cuts off at this point).

### V. ORGANIZATION OF THE PAPER (structure)
- Remaining sections (as listed in the source):
  - Section III analyzes the impact of financial crises on unemployment.
  - Section IV assesses the effect of labor institutions in shaping the response of unemployment to financial crises.
  - Section V analyzes the effect of labor market policies on unemployment outcomes.
  - Section VI concludes.

*Source: _wp1265 - References .............................................................................................................*

### 0.5 percent over the medium term—six years thereafter. Our findings are consistent with the

### _wp1265 - 0.5 percent over the medium term—six years thereafter. Our findings are consistent with the

### Effects of financial crises on unemployment outcomes
- Financial crises increase overall unemployment by about 0.5–1 percent in OECD evidence cited (Furceri and Mourougane (2009)) and by about ¾ percentage point in structural unemployment (Guichard and Rusticelli (2010)).
- Peak effect on youth unemployment: increase of 2 percent, occurring one year after the crisis; effect over the medium term is statistically insignificant.
- Long-term unemployment: effect is extremely persistent, becomes statistically significant only two years after the crisis, and over the medium term (six years after the crisis) long-term unemployment stabilizes at a level 6 percentage points higher than the pre-crisis level (suggesting hysteresis effects).
- Comparison of magnitudes: large-scale changes in labor market policies are associated with a decrease in unemployment of about ¾ percent over the medium term—similar in absolute terms to the increase associated with financial crises.

### Robustness tests for crisis-unemployment estimates
- Re-estimated equation (1) including alternatively: (i) time fixed effects, (ii) regional fixed effects, and (iii) a country-specific time trend; results remain statistically significant and broadly unchanged.
- Sample restricted to countries with data for change in unemployment available for each period k; results remain statistically significant and qualitatively unchanged.

### Labor market flexibility and the response of unemployment to financial crises
- Augmented regression includes labor market flexibility indicators (L) and interactions with the crisis dummy.
- Short-term vs. medium-term response:
  - Short-term impact of crises on unemployment is higher in countries with more flexible labor markets.
  - Medium-term effect of crises on unemployment is larger in countries with more rigid labor markets.
  - Difference in response is statistically significant in both the short and medium term.
- Quantified effects:
  - An increase of one point in the labor market flexibility composite indicator increases the short-term effect of crises on unemployment by 0.4 percentage point.
  - The same one-point increase reduces the medium-term impact by about 0.6 percentage point.
- Sub-indicators with largest medium-term impact: hiring and firing regulations and centralized collective bargaining.
- Results for composite indicator are qualitatively similar for youth and long-term unemployment.
- Robustness: restricting sample to countries with complete data for each period k yields qualitatively unchanged results.

### Labor market policies and unemployment outcomes — large-scale changes
- Identification: a large change defined when annual change in composite labor market flexibility indicator exceeds by two standard deviations the average annual change; identification carried out during 2000–08 due to data availability.
- Episodes identified: 48 episodes of large-scale labor market reforms mostly occurring during the past decade.
- Dynamic impact (IRFs for k = 0,...,6):
  - It takes, on average, about six years before effects of labor market reforms on unemployment materialize.
  - Effects over the medium term are statistically significant and sizeable.
- Estimated medium-term effect:
  - Large-scale changes in labor market policies are associated with a decrease in unemployment of about ¾ percent over the medium term.
- Disaggregated outcomes:
  - Medium-term estimates for the composite flexibility indicator are statistically significant for youth unemployment but insignificant for long-term unemployment.
  - Sub-indicators:
    - Changes in minimum wages and mandated cost of hiring have a statistically significant impact on youth unemployment.
    - Changes in hiring and firing regulation and conscription have a statistically significant medium-term impact on long-term unemployment.
- Policy implication: reforms lowering hiring costs and reducing rigidity in hiring and firing regulation may have large and significant impact on unemployment outcomes.

### Endogeneity concerns and identification strategies
- Potential bias: OLS estimates of equation (3) may be biased towards zero if worsening economic conditions increase the probability of change in labor market policies and βk is negative.
- Two strategies to address endogeneity:
  1. Instrument equation (3) using variables significantly correlated with probability of changes in labor market institutions (from Probit results).
  2. Decompose the effect into expected effect (predicted probability of change) and residual (unpredicted effect) using equation (4): Rit = RitE + ωit, where RitE represents predicted probability from Probit and ωit the error term.
- Determinants of reforms (Probit findings):
  - Pre-existing level of the labor market institutions index: the higher the quality, the less likely a country is to implement a change.
  - Favorable economic situation (GDP growth gap vs. five-year moving average, gap_growth) decreases probability of change.
  - Lagged unemployment rates do not seem to affect probability of implementing large-scale changes.
  - Political factors:
    - Degree of decentralization in executive power increases probability of changes.
    - Length of time the chief executive’s party has been in power has a negative effect on probability of changes.
    - Election cycles, political ideology, government fractionalization, political stability measures, and constitutional limits tested but statistically insignificant.

### Results using instrumental variables and decomposition
- IV estimation (instruments: pre-existing labor market index, degree of decentralization, length of time chief executive’s party in power, output gap) confirms significant medium-term effect of labor market policies on unemployment; IRFs statistically significant after five years.
- IV magnitudes:
  - IV estimates suggest labor market policies may lead to a reduction in unemployment of about 2.5 percentage points over the medium term (larger than OLS baseline).
- Decomposition findings:
  - Anticipated effect of changes in policy is considerably larger than the unpredicted component; difference not statistically significant in most cases.
  - The coefficient on the unanticipated effect is statistically significant in all specifications and its magnitude is close to the baseline regression estimate.

### Gradual changes in labor market institutions
- Concern: large-threshold identification may miss gradual reforms that unfold over longer periods.
- Alternative specification (equation (5)): replace reform dummy with change in the labor market flexibility indicator (ΔLM).
- OLS estimates of equation (5):
  - An increase of one point in the labor market flexibility indicator decreases unemployment by about 0.5 percent over the medium term.
- IV estimates (instrumenting changes in composite indicator with variables correlated with probability of reforms) suggest larger effects than OLS.

*Italic: Content derived from the provided IMF PDF chapter/section.*

### 1.2 percent over the medium term.

### _wp1265 - 1.2 percent over the medium term.

### Conclusions
- Using a novel panel data set for a large number of countries, the paper finds that the impact of financial crises on unemployment largely depends on the flexibility of labor market institutions.
- Impulse responses:
  - In countries with more flexible labor markets, the impact of financial crises is sharper but short-lived.
  - In countries with more rigid labor markets, the effect of financial crises is initially more subdued, but highly persistent.
- Effects by group:
  - More pronounced for youth unemployment in the short term, possibly due to higher vulnerability and declining labor market participation in the medium term.
  - Impact on long-term unemployment is very pronounced in the medium term, highlighting potential hysteresis effects.
- Labor market policies:
  - Some evidence that large upfront, or gradual but significant comprehensive labor market policies may reduce unemployment in the medium term.
  - The positive impact of labor market policies is particularly pronounced for the young.
  - Adoption of such labor market policies is less likely in more centralized political regimes that are long-lasting, and when institutions are already more flexible and economic conditions relatively good.
- Design and sequencing issues:
  - Employment protection should internalize social costs and not inhibit job creation and labor reallocation.
  - Reforms should aim to improve quality of employment and minimize possible negative short-term effects (not investigated here) on inequality and job destruction.
  - Protect workers rather than jobs: couple unemployment benefits with pressure on the unemployed to take jobs and measures to help them (Blanchard, 2006).
  - Avoid artificial restrictions on individual employment contracts.

### Figure note
- Figure 11: The Effects of Gradual Labor Market Policies on Unemployment (In percentage points)
  - Note: Solid line represents the estimated IRF; dotted lines represent 95 percent confidence bands.
  - (Graphic axis labels include values: -1.5, -1, -0.5, 0, 0.5, 1 and time indices 0–7 as shown in chart.)

### Key statistics (Table 1: Summary Statistics for Labor Market Outcomes and Flexibility Indicators)
- Labor market outcomes:
  - Unemployment: Obs. 2826; Mean 8.9; Std. Dev. 5.9; Min 0.0; Max 37.3
  - Long-term unemployment: Obs. 984; Mean 33.8; Std. Dev. 18.3; Min 0.5; Max 84.9
  - Youth unemployment: Obs. 1669; Mean 17.6; Std. Dev. 10.5; Min 0.7; Max 70.9
- Labor market flexibility:
  - Composite index: Obs. 1214; Mean 5.9; Std. Dev. 1.5; Min 1.8; Max 9.5
  - Minimum wage: Obs. 1135; Mean 6.2; Std. Dev. 2.7; Min 0.0; Max 10.0
  - Hiring and firing regulations: Obs. 1056; Mean 4.7; Std. Dev. 1.5; Min 1.0; Max 8.8
  - Centralized collective bargaining: Obs. 1124; Mean 6.4; Std. Dev. 1.5; Min 1.8; Max 9.5
  - Mandated cost of hiring: Obs. 1166; Mean 6.9; Std. Dev. 2.0; Min 1.9; Max 10.0
  - Mandated cost of worker dismissal: Obs. 927; Mean 5.8; Std. Dev. 3.1; Min 0.0; Max 10.0
  - Conscription: Obs. 1656; Mean 5.9; Std. Dev. 4.3; Min 0.0; Max 10.0
- Source: Fraser Institute’s Economic Freedom of the World (EFW) database.

### Correlations (Table 2 highlights)
- U and YU: 0.51***
- U and LU: 0.90***
- YU and LU: 0.56***
- L (composite flexibility) correlations:
  - with U: -0.11***
  - with YU: -0.22***
  - with LU: -0.13***
- M (minimum wage) correlations:
  - with L: 0.64***
- H (hiring/firing regulation) correlations:
  - with L: 0.44***
- Note: U=unemployment; YU=youth unemployment; LU=long-term unemployment; L=composite labor market flexibility index; M=minimum wage; H=hiring and firing regulation; C=centralized collective bargaining; MCH=mandated cost of hiring; MCW=mandated cost of work dismissal; CO=conscription. *, **,*** denote significance at 10 percent, 5 percent, and 1 percent, respectively.

### Short- and medium-term crisis effects by flexibility (Table 3, selected coefficients)
- Initial effect (Crisis) on unemployment (various specifications):
  - Crisis: 1.314 (4.43)***
  - Crisis: 1.392 (4.86)***
  - Crisis: 1.315 (4.33)***
  - Crisis: 1.834 (3.49)***
  - Crisis: 1.503 (4.47)***
  - Crisis: 2.116 (6.04)
  - Crisis: 1.254 (3.36)***
- Crisis*Flexibility indicator (initial effect):
  - 0.395 (2.26)**; 0.078 (0.69); 0.300 (1.60)*; 0.300 (1.60)*; 0.160 (1.22); 0.149 (1.60)*; -0.028 (-0.46)
- Medium term effect (Crisis):
  - Crisis: -0.260 (-0.50); 0.019 (0.02); -0.043 (-0.10); -0.805 (-1.47); -0.394 (-0.61); -1.110 (-3.12)***; 0.179 (0.32)
- Crisis*Flexibility indicator (medium term effect):
  - -0.564 (-2.14)**; -0.201 (-0.58); -0.441 (-1.87)*; -0.441 (-1.87)*; -0.354 (-1.41); -0.402 (-6.81)***; -0.324 (-3.16)***
- Note: L=composite labor market flexibility index; M=minimum wage; H=hiring and firing regulation; C=centralized collective bargaining; MCH=mandated cost of hiring; MCW=mandated cost of work dismissal; CO=conscription. T-statistics based on robust clustered standard errors in parenthesis. *,**,*** denote significance at 10 percent, 5 percent, and 1 percent, respectively.

### Medium-term effect of labor market policies — OLS (Table 4, selected coefficients)
- Unemployment (Reform t):
  - L: -0.740 (-3.05)***
  - M: -0.844 (-4.07)***
  - H: 0.516 (1.38)
  - C: -0.387 (-0.88)
  - MCH: -0.900 (-5.52)***
  - MCW: 0.040 (0.12)
  - CO: -0.220 (-0.28)
- Youth Unemployment (Reform t):
  - L: -1.908 (-3.64)***
  - M: -1.983 (-4.64)***
  - H: 0.349 (0.38)
  - C: -1.207 (-0.62)
  - MCH: -1.921 (-4.53)***
  - MCW: n.a.
  - CO: -1.627 (-0.56)
- Long-term unemployment (Reform t):
  - L: -0.621 (-0.54)
  - M: -0.073 (-0.07)
  - H: -7.283 (-4.02)***
  - C: -1.728 (-0.71)
  - MCH: -0.410 (-0.30)
  - MCW: n.a.
  - CO: -6.225 (-1.88)*
- Note: T-statistics based on robust clustered standard errors in parenthesis. *,**,*** denote significance at 10 percent, 5 percent, and 1 percent, respectively.

### Probability of large-scale changes in labor market institutions (Table 5, selected coefficients)
- l.area5b: coefficients across models range from -0.241 to -0.266 with Z-statistics (e.g., -4.22)***, (-3.93)***, (-4.20)***, (-4.16)***, (-4.42)***, (-4.25)***, (-4.01)***.
- gap_growth: coefficients around -0.046 to -0.065 with Z-statistics (e.g., (-2.20)**, (-2.40)**, (-2.50)**, (-2.37)**).
- system: coefficients around 0.244 to 0.281 with Z-statistics (e.g., (2.89)***, (2.33)**, (2.87)***, (2.90)***, (3.25)***, (2.91)***, (2.70)***).
- prtyin: coefficients about -0.013 to -0.001 with Z-statistics including (-1.81)*, (-1.51), (-1.13).
- Additional covariates included in some specifications: l.lur, lnpop, lnopenk, lncg, d.l.cg with associated coefficients and Z-statistics as reported.
- Pseudo R2: 0.08–0.10 across columns.
- N: 667, 510, 667, 667, 667, 667, 510
- Note: Z-statistics based on robust clustered standard errors in parenthesis. *,**,*** denote significance at 10 percent, 5 percent, and 1 percent, respectively.

### Medium-term effect robustness (Table 6, IV robustness checks)
- Policy t:
  - (I): -2.478 (-4.76)***
  - (II): -2.478 (-4.76)***
  - (III): -1.991 (-3.92)***
  - (IV): -2.456 (-4.81)***
  - (V): -2.512 (-4.81)***
  - (VI): -2.358 (-4.71)***
  - (VII): -1.879 (-3.84)***
- Controls (examples):
  - ܷ௜,௧ : -1.546 (-10.23)*** (consistent across columns)
  - ܷ∆௜,௧ିଵ : 0.462 (3.50)***
  - ܷ∆௜,௧ିଶ : 0.347 (3.34)***
  - Crisis dummies: 0.591 (1.38) (columns show 0.591 and 0.590)
- R2: values reported 0.84–0.85
- N: 380 in all columns
- Note: T-statistics based on robust clustered standard errors in parenthesis. *,**,*** denote significance at 10 percent, 5 percent, and 1 percent, respectively. Each column corresponds to different Probit estimates reported in Table 4.

### Expected vs. non-expected policy effects (Table 7)
- Policy t:
  - Anticipated: coefficient examples include -3.795 (-2.26)**; -3.652 (-2.31)**; -3.753 (-2.25)**; -3.480 (-2.38)**
  - Non-anticipated: -0.721 (-2.90)***; -0.710 (-2.83)***; -0.694 (-2.77)***
- Controls (selected):
  - ܷ௜,௧ : -1.576 (-6.93)*** to -1.581 (-6.91)***
  - ܷ∆௜,௧ିଵ : 0.427 (2.33)** to 0.442 (2.38)**
  - ܷ∆௜,௧ିଶ : 0.349 (2.63)*** to 0.354 (2.67)***
  - Crisis dummies: ~0.636–0.657 with Z-statistics ~ (1.12)–(1.16)
- R2: 0.87 across columns
- N: 380 across columns
- Note: T-statistics based on robust clustered standard errors in parenthesis. *,**,*** denote significance at 10 percent, 5 percent, and 1 percent, respectively.

### Annex — Data definitions (selected)
- Unemployment:
  - Unemployment rate (lur, from WEO): Percentage of the total labor force that is currently unemployed.
  - Youth unemployment rate (unempyouth, from WDI): Percentage of the total labor force of ages 15 to 24 that is currently unemployed.
  - Long-term unemployment (unemplong, from WDI): Fraction (in percent) of the unemployment rate that is of long-term.
- Macroeconomic variables:
  - GDP per capita (rgdpl, from WEO): Purchasing power parity (PPP) converted GDP per capita (with the Laspeyres methodology), derived from growth rates of private consumption, government expenditures, and investment at 2005 constant prices.
  - Demand pressure (gap_growth_n): Gap in the current real GDP per capita growth with respect to a moving average of n years, centered at the current period.
  - Government size (lncg, from PWT): (log) Government consumption share of PPP converted GDP per capita at current prices, in percent.
  - Openness (lnopenk, from PWT): (log) Openness at 2005 constant prices, in percent.
- Demographic variables:
  - Population size (lnpop, from PWT): (log) Total population (in thousands).
  - Urbanization (lnurbpop, from WDI): (log) Urban population, as percent of total population.
  - Density (lnpopdens, from WDI): (log) Population density, measured by the number of people per square kilometer of land area.
- Political institutions:
  - Executive system (system): Assigns values of 0 if the system is “presidential”, 1 if there is an Assembly-elected President, and 2 if the system is “parliamentary”.
  - Length of party of executive chief in office (prtyin): Number of years that the party of the executive chief is in the office.
- Financial crisis:
  - Financial crisis indicator (crisis): Dummy variable equals 1 in years in which a country was going through a financial crisis according to Laeven and Valencia (2010), and 0 otherwise.

*Source: _wp1265 - 1.2 percent over the medium term.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp1265.pdf_