This chapter discusses how the effects of structural labour market reforms depend on whether the economy is in expansion or recession. Based on an empirical time series model with Markov switching that draws on search and matching theory, we propose a novel identification of reform outcomes and distinguish the effects of structural reforms that increase the flexibility of the labour market in distinct phases of the business cycle. We find in applications to Germany and Spain that reforms which are implemented in recessions have weaker expansionary effects in the short run. For policymakers, these results emphasize the costs of introducing labour market reforms in recessions.
A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market