Drivers and effects of labour market reforms: Evidence from a novel policy compendium

Dragos Adascalitei,Clemente Pignatti Morano

doi:10.1186/s40173-016-0071-z

Abstract

Abstract The paper analyses the determinants and short-term effects of labour market reforms, using information from a novel policy compendium that covers 110 developed and developing economies between 2008 and 2014. We find that the approval of reforms is positively associated with the unemployment rate, the simultaneous implementation of fiscal consolidation measures and the presence of a fixed exchange rate regime. Differences in the results are explored by looking at the direction of reforms (i.e. increasing or decreasing legislation), temporal horizon (i.e. temporary or permanent measures) and coverage (i.e. complete or two-tier reforms); while also analysing separately reforms’ determinants across domains of labour legislation (e.g. permanent contracts, collective dismissals). Finally, we find that deregulatory labour market reforms tend to increase the unemployment rate in the short run when they are approved during contractionary periods—while they have a non-significant effect when approved during periods of economic stability or expansion. JEL Classification: J20, J52, J38, J48, J58, K31

Highlights

Reforms of labour legislation have been amongst the most widely spread policy interventions used by governments in recent years in order to address the negative effects of the global financial and economic crisis
When analysing the effects of reforms at different points of the business cycle, the results reveal that deregulatory labour market reforms increase the unemployment rate in the short run when they are approved during crises—while not having a statistically significant effect if they are implemented during periods of economic stability or expansion
Our descriptive analysis reveals that the number of interventions to labour legislation has increased in the first years after the beginning of the crisis and that the majority of the reforms have been approved in developed economies and EU member states in particular

Summary

Introduction

It is worth noting that the share of reforms decreasing existing levels of regulation has substantially varied across areas of policy intervention, ranging from 74 % of the total for working hours, 65 % for temporary employment contracts, 62 % for collective dismissals, 59 % for permanent contracts, 46 % for collective bargaining and 28 % for other forms of employment This shows that the deregulatory trend has first concerned crisis-related labour market interventions (i.e. working hours), while reforms aimed at tackling structural issues in the labour market (e.g. other forms of employment) did not show a similar cyclical evolution. The continuation of the analysis will consider the different developing regions in a single aggregate

Empirical analysis

Conclusions

Findings

Sub-Saharan Africa