Does Greater Labour Market Flexibility Induce Greater Levels of Inequality within Europe?

Abstract

Economic and social inequality is often thought to be contingent on varying degrees of labour market flexibility. This paper investigates this causal nexus and tests the correlation between flexibility and inequality for the European labour market by using evidence from European labour market institutions and data from several sources of inequality measures. We find that, on a pan-European level, there is overwhelming evidence that inequality levels do not fluctuate with varying degrees of labour market flexibility. On a country-specific level, we find several labour market characteristics that promote flexibility and equality. They include decentralized labour market institutions, low utilization of temporary work, and redundancy systems that unite low employment protection with high economic and social protection. Taken together, these factors enable the European labour market to buck the stylized perception that high labour market flexibility is coupled with high inequality.