Coordination and transmission of labor market policies in the economic union

Abstract We build a multi-country model with intermediate-input trade and frictional labor markets and estimate it using a global vector autoregression for the European Union 15 old member states. The framework traces how reforms propagate through input–output linkages and ‘import-back’ feedbacks and shows that theory-based long-run restrictions and transmission weights materially affect inference. Domestic (single-country) shocks have modest, often insignificant effects. By contrast, coordinated policy changes matter: joint employment-protection reforms durably raise employment and gross domestic product, with some increase in long interest rates. These results are robust under trade- and theory-based propagation and remain when policy variables are treated as predetermined.