Club convergence of labor market institutions in the European Union

Abstract

This paper analyzes the convergence of labor market institutions in the European Union (EU) to test for the economic integration of EU countries from 1993 to 2018. The convergence is measured by using a flexible approach of the log-t regression for five indicators of labor market institutions: employment protection legislation index (EPL), tax wedge, unemployment benefits, active labor market policies, and minimum wages. The results suggest no convergence in labor market institutions between the EU member states. The differences between the institutions are still substantial, and the labor market institutions are changing too slowly to converge. The empirical analysis also considers the possibility of club convergence, differentiating between the endogenous clubs based on clustering algorithm, and the exogenous clubs based on geographical proximity and similarities of labor market institutions. Convergence is present only in endogenous clubs that are determined by different demographic, competitiveness, and economic factors. Since labor market institutions are the fundamental determinants of employment and unemployment, the differences found in the labor market institutions suggest that employment and unemployment levels in the EU will hardly converge, implying weak labor market integration.