Measuring Macroeconomic Uncertainty: The Labor Channel of Uncertainty from a Cross-Country Perspective

TL;DR

This paper develops a method to measure macroeconomic uncertainty across countries using data revisions, and finds that employment protection legislation influences the impact of uncertainty shocks on economies.

Contribution

It introduces a new cross-country measure of macroeconomic uncertainty based on data revisions and analyzes its effects considering employment protection levels.

Findings

Uncertainty shocks have stronger effects in countries with low employment protection.

The effects of uncertainty are more persistent in countries with low employment protection.

Empirical results align with a theoretical model involving firing costs.

Abstract

This paper constructs internationally consistent measures of macroeconomic uncertainty. Our econometric framework extracts uncertainty from revisions in data obtained from standardized national accounts. Applying our model to post-WWII real-time data, we estimate macroeconomic uncertainty for 39 countries. The cross-country dimension of our uncertainty data allows us to study the impact of uncertainty shocks under different employment protection legislation. Our empirical findings suggest that the effects of uncertainty shocks are stronger and more persistent in countries with low employment protection compared to countries with high employment protection. These empirical findings are in line with a theoretical model under varying firing cost.