Robust political economy correlates of major product and labor market reforms in advanced economies: Evidence from BAMLE for logit models

Abstract

Summary The political economy literature has put forward a multitude of hypotheses regarding the drivers of structural reforms, but few, if any, empirically robust findings have emerged thus far. To make progress, we draw a parallel with model uncertainty in the growth literature and provide a new version of the Bayesian averaging of maximum likelihood estimates (BAMLE) technique tailored to binary logit models. Relying on a new database of major past labor and product market reforms in advanced countries, we test a large set of variables for robust correlation with reform in each area. We find widespread support for the crisis‐induces‐reform hypothesis, as high unemployment and economic crises are robustly correlated to structural reforms. We also find evidence of reform convergence—that is, countries with tighter regulation are more prone to liberalize. Reforms are more likely when other countries also undertake them and when there is formal pressure to implement them. Other robust correlates are more specific to certain areas—for example, international pressure and political factors are most relevant for product market and job protection reforms, respectively.

The Macroeconomic Effects of Structural Reforms in Latin America and the Caribbean

“…Prati, Onorato, and Papageorgiou (2013) also find for a broader sample of countries, some evidence that severe growth downturns are associated with subsequent reform upticks. These findings are broadly confirmed by Duval, Furceri and Miethe (2020) in a sample of Advanced Economies for product and labor market reforms using Bayesian model averaging techniques. They find evidence to support the hypothesis that economic crises induce reforms and also conclude that there is reform convergence (countries with tighter regulation are more prone to liberalize).…”

Labor and Product Market Reforms and External Imbalances

“…Next, we re-estimated our main regression for reforms in the each of the following individual PMR areas: telecoms, postal services, electricity, gas, air transport, rail transport, and road transport (Figure A8 in the Annex). Finally, to mitigate endogeneity concerns, we re-estimated equation ( 1) with an Instrumental Variable (IV) approach, using as instruments political economy variables found in the literature to induce reforms (Duval, Furceri and Miethe, 2020). The IV results are similar to, and not statistically different from, those obtained using OLS, suggesting that endogeneity is not a serious concern in our case (Figure A9 in the Annex).…”

Post-Covid-19 Recovery and Resilience

“…Alternatively, a crisis can create the incentives to implement reforms (Drazen and Grilli (1993); Rodrik (1996)), particularly in cases where access to external financing creates market discipline. Empirical evidence on crisis-induced reforms however remains mixed, with some reforms being implemented (see Duval, Furceri, and Miethe (2020) for a review). Da Silva et al (2017) find that labor market reforms are more likely among OECD and EU countries during deep recessions.…”