Does labor market flexibility boost GDP and macroeconomic stability?

ABSTRACT
Since the beginning of the 1990s, the worldwide consensus in labor market was to set up a minimum regulation and interventions in favor for higher flexibility to tackle unemployment and boost economic growth. In fact, fostered by these arguments, international organization such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) have recommended that countries should adopt reforms, these include flexibly unemployment benefit systems, collective bargaining, and employment protection legislation, in favor to flexibly their labor markets. The aim of this paper is to analyze whether market labor flexibility boost GDP and macroeconomic stability. To do so, we use a dynamic panel data for a sample of 120 developed and emerging economies over the period of 2006 to 2019. The results of our paper will contribute to fill it up the literature and the empirical gap existence about the impacts of labor market flexibilization.

RESEARCH PROBLEM
The relationship from market labor flexibilization on economic growth (see Appendix 1) and on economic business cycle (see Appendix 2) seems quite obvious, whereas the greater the flexibility of the market it is, the faster firms react to exogenous shock, and this in turn, on the aggregate production. Firms within a country with greater level of labor market flexibility will adjust their employment faster in case there would be any exogenous change. For instance, assuming there is a negative exogenous shock that affects aggregate demand, firms within a rigidity labor market would not be able to dismiss their employees, which it worse off the impact on the current GDP, and in turn, in the macroeconomic stability.
However, the literature review about the impact of labor market flexibilization is not conclusive, either in economic growth nor another economic outcome. There is an extended literature review of labor market flexibilization on economic growth, on employment unemployment outcomes, on innovation and labor productivity, on labor force participation, on labor market flows, on fixed capital formation and investment, on social protection expenditures and fiscal results, on income inequalities, on monetary poverty (see our Literature Review section). Nevertheless, results from this evidence are not conclusive, due to some papers find positive effects of market liberalization, while others negative. On the other hand, when it comes to analyzing market labor flexibility on the phase of the business cycle or in the macroeconomic stability, there are literature, but in a lesser extent, which is also not conclusive in terms of impact.