Labor market institutions and technology-induced labor adjustment along the extensive and intensive margins

What is the composition of total hours response to a technology shock in countries with different labor market institutions in terms of extensive and intensive margin movements? To answer this question, I identify technology shocks using structural vector autoregressions (SVARs) and decompose the responses of hours into adjustments along the extensive and intensive margins. I compare the adjustments along the two margins between groups of countries with strict and flexible labor market institutions. I find that both margins play a large role in accommodating technology shocks, with adjustments along the intensive margin being more important. Furthermore, countries with flexible labor market institutions display a larger drop in employment, whereas the results for the intensive margin are mixed. Finally, the cross-country differences in fluctuations along the two margins can be linked to the strictness of institutions that target quantity and price adjustments in the labor market.

Automated summary

This study investigates the composition of total hours response to a technology shock in countries with different labor market institutions. The findings suggest that adjustments along both the extensive and intensive margins are significant, with the intensive margin playing a more important role. Furthermore, countries with flexible labor market institutions experience a larger drop in employment, while the results for the intensive margin are mixed. The cross-country differences in fluctuations along the two margins can be linked to the strictness of institutions targeting quantity and price adjustments in the labor market.