We study empirically how various labour market institutions – (i) union density, (ii) unemployment benefit remuneration, and
(iii) employment protection – shape fiscal multipliers and output volatility. Our theoretical model highlights that more stringent
labour market institutions attenuate both fiscal spending multipliers and macroeconomic volatility. This is validated empirically
by an interacted panel vector autoregressive model estimated for 16 OECD countries. The strongest effects emanate from employment
protection, followed by union density. While some labor market institutions mitigate the contemporaneous impact of shocks,
they, however, reinforce their propagation mechanism. The main policy implication is that stringent labor market institutions
render cyclical fiscal policies less relevant for macroeconomic stabilization.