Does labour market flexibility boost or discourage the economic business cycle?

The aim of this article is to analyze whether labour market flexibility has either boosted or discouraged the economic business cycle, understood as repeated ups and downs in a country’s economic activity, in a sample of 80 countries, including both developing and developed nations, over the period from 2007 to 2019, considering the phase of the business cycle: recession or expansion. To achieve this, various estimation methods are used: pooled ordinary least squares, static panel fixed effects, and a general method of moments for dynamic panel data. The results show that labour market flexibility does not affect the business cycle overall; however, increasing labour market flexibility during a recession exacerbates the recession. On the other hand, there is no evidence that labour market flexibility during an expansionary period benefits the business cycle. The results remain robust when controlling with interaction terms for income levels. Specifically, easing labour market regulations during a recession exacerbates the economic cycle in both developing and developed countries, while during an expansionary period, the economic business cycle benefits positively in developing countries but not in developed countries.