Fiscal consolidation and unemployment: does EPL matter?: A look at EU countries

Table 6 Impact of consolidations on cyclical unemployment by EPL strictness,

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
Dependent variable: cyclical unemployment	Budget balance		Revenue		Expenditure		“Top-down” change in structural balance
	Action-based		Action-based		Action-based
Explanatory variables	13 EU countries, 1980-2009		13 EU countries, 1980-2009		13 EU countries, 1980-2009		21 EU countries, 1980-2010
	Low EPL	High EPL	Low EPL	High EPL	Low EPL	High EPL	Low EPL	High EPL
Cyclical unemployment (1 lag)	1.230**	1.222**	1.247**	1.228**	1.212**	1.217**	1.219**	1.191**
	[27.28]	[12.95]	[29.48]	[13.26]	[25.51]	[13.45]	[19.49]	[22.91]
Cyclical unemployment (2 lags)	−0.625**	−0.618**	−0.630**	−0.619**	−0.624**	−0.616**	−0.599**	−0.602**
	[−16.92]	[−8.179]	[−14.33]	[−7.887]	[−19.25]	[−8.326]	[−13.30]	[−10.46]
Fiscal policy variable	0.0947	0.0415	0.0567	−0.0103	−0.178+	−0.0891	0.0141	0.281
	[1.828]	[0.464]	[0.775]	[−0.0553]	[−2.107]	[−0.799]	[0.250]	[1.473]
Constant	0.598*	−0.140	0.643*	0.330	0.584*	−0.184	0.268	−0.173
	[2.610]	[−0.834]	[2.672]	[1.510]	[2.651]	[−0.336]	[1.781]	[−1.050]
Observations	196	157	196	157	196	157	260	216
R-squared	0.889	0.859	0.886	0.859	0.891	0.859	0.855	0.794
Number of countries	7	6	7	6	7	6	11	10

+, *, ** denote statistical significance at the 10, 5, 1 per cent level respectively. T tests are reported in square brackets.
Specification. All regressions include country and year fixed effects.
Estimation method. Action-based fiscal policy: fixed effect panel OLS. Top-down fiscal policy measures: fixed effect panel instrumental variables (the fiscal policy variable is instrumented with its own lag, the lagged output gap, and the lagged government debt/GDP ratio). Standard errors are robust with respect to hetereoschedasticity and non-independence within country clusters.
Legend. Fiscal variables: see footnote to Table 1. The grouping of countries with respect to the OECD EPL indicator for permanent employment is built on the basis of the median country-specific average value of the indicator over the sample period.