Effects of Flexibility-Enhancing Reforms on Employment Transitions

Reforms that boost growth by enhancing economic flexibility often meet strong opposition related to concerns that they may imply adverse consequences for categories of workers. This study investigates how making product or labour market regulation more flexible changes workers’ risks of moving out of employment and jobless people’s chances of becoming employed. To do so, it employs specially harmonised micro-level data covering individual workers in 26 OECD countries. The micro-econometric regressions reveal that labour market reforms do not uniformly influence transitions in and out of employment but that their effects vary depending on institutions and other policy settings. For instance, making employment protection of regular contracts more flexible is associated with more transitions into employment in countries that have above-average activation programmes. As for product market reforms, they are found to boost transitions into employment, especially for women, and to have no systematic effect on exits, so that overall they tend to boost aggregate employment, in line with earlier evidence. The micro-data show that workers with low earnings potential, who, already before reforms, experience much higher transition rates in and out of employment than other groups, face particularly strong increases in employment churn when product market regulations become more flexible. Additional micro-econometric analysis focusing on sectors subject to specific product market regulation (energy, transport, communication) reveals that workers employed in tightly regulated sectors typically earn more than their peers with similar characteristics working elsewhere. Taken together, the findings can help enhance reform design, in particular by highlighting the benefits of (a) policy packages drawing on complementarities between product and labour market reforms, (b) active labour market programmes that effectively support more vulnerable workers and (c) broad reforms over narrow compensation schemes.<p>Flexibilité économique : Que faut-il en attendre pour les travailleurs ? Les réformes qui visent à stimuler la croissance en misant sur une plus grande flexibilité de l’économie rencontrent souvent une forte opposition en raison des retombées négatives qu’elles font craindre pour certaines catégories de travailleurs. Cette étude explore les incidences qu’un assouplissement de la réglementation du marché du travail ou du marché des produits peut avoir sur le risque de perdre son emploi pour ceux qui en ont un et sur les chances de trouver un emploi pour ceux qui n’en ont pas. Pour cela, les auteurs utilisent des microdonnées individuelles spécialement harmonisées portant sur 26 pays de l’OCDE. Les régressions microéconométriques montrent que les réformes du marché du travail n’ont pas toute la même incidence sur les transitions professionnelles, mais que leurs effets varient en fonction du cadre institutionnel et d’autres paramètres de l’action gouvernementale. Par exemple, une protection plus souple des contrats à durée indéterminée va de pair avec une hausse des transitions vers l’emploi dans les pays où les programmes d’activation sont plus développés que la moyenne. Quant aux réformes du marché des produits, on constate qu’elles favorisent les transitions vers l’emploi, surtout chez les femmes, et qu’elles n’ont pas d’effet systématique sur les sorties, ce qui confirme leur aptitude à doper l’emploi global, comme d’autres travaux l’ont déjà démontré. Les microdonnées montrent que les travailleurs à faible potentiel de gains qui connaissent déjà, avant les réformes, des changements de situation beaucoup plus fréquents que les autres catégories sur le marché du travail, sont exposés à une hausse particulièrement forte de leur taux de rotation lorsque la réglementation du marché des produits s’assouplit. Une autre analyse micro-économétrique centrée sur les secteurs faisant l’objet de réglementations spécifiques (énergie, transports, communications) révèle que les travailleurs des secteurs strictement réglementés sont généralement mieux payés, à caractéristiques égales, que les travailleurs des autres secteurs. Considérés dans leur ensemble, les résultats de l’étude peuvent aider à améliorer la conception des réformes en soulignant notamment les avantages que présentent a) des mesures axées sur la complémentarité entre les réformes du marché des produits et du marché du travail, b) des programmes actifs du marché du travail efficaces pour venir en aide aux travailleurs les plus vulnérables, et c) des réformes de grande envergure plutôt que des systèmes de compensation limités à certains secteurs.

We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.

Labor and product market reforms and external Imbalances: Evidence from advanced economies

Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies

This paper explores the productivity impact of trade, product market and financial market policies over the last decade in China – a fast growing country where, despite significant reform action, regulatory stance remains still far from OECD standards. The paper makes a critical distinction between downstream and upstream industries, focusing on the indirect effects of regulation in upstream industries on firm performance in downstream manufacturing industries. This framework allows investigating the link between these policies and productivity growth depending on how far incumbents are relative to the technological frontier. The analysis is novel in several respects. Drawing on new OECD policy indicators of sector-level product market regulation and firm level data, econometric estimates deliver new evidence on the potential gains from product and financial market reforms in China, two policy areas that had not been studied in previous empirical literature. Firm-level microeconomic data further allow shedding light on the differential effects of policies within industries, while also highlighting the potential channels through which productivity is affected by reform. The key conclusion that can be derived from the empirical analysis is that further product, trade and financial market reforms would bring substantial gains in China and could therefore speed up the convergence process. Taken at face value, the empirical estimates would imply that aligning product, trade and financial market regulation to the average level observed in OECD countries would bring aggregate manufacturing productivity gains of respectively 9%, 4% and 6.5% after five years. Trade and product market reforms are found to deliver stronger gains for firms that are closer to the industry-level technological frontier, while the reverse holds for financial market reforms.

SummaryThe political economy literature has put forward a multitude of hypotheses regarding the drivers of structural reforms, but few, if any, empirically robust findings have emerged thus far. To make progress, we draw a parallel with model uncertainty in the growth literature and provide a new version of the Bayesian averaging of maximum likelihood estimates (BAMLE) technique tailored to binary logit models. Relying on a new database of major past labor and product market reforms in advanced countries, we test a large set of variables for robust correlation with reform in each area. We find widespread support for the crisis‐induces‐reform hypothesis, as high unemployment and economic crises are robustly correlated to structural reforms. We also find evidence of reform convergence—that is, countries with tighter regulation are more prone to liberalize. Reforms are more likely when other countries also undertake them and when there is formal pressure to implement them. Other robust correlates are more specific to certain areas—for example, international pressure and political factors are most relevant for product market and job protection reforms, respectively.

This paper describes a new database of major labor and product market reforms covering 26 advanced economies over the period 1970-2013. The focus is on large changes in product market regulation in seven individual network industries, employment protection legislation for regular and temporary workers, and the replacement rate and duration of unemployment benefits. The main advantage of this dataset is the precise identification of the nature and date of major reforms, which is valuable in many empirical applications. By contrast, the dataset does not attempt to measure and compare policy settings across countries, and as such is no substitute for other publicly available indicators produced, for example, by the ILO, the OECD or the World Bank. It should also be seen as work in progress, for researchers to build on and improve upon. Based on the dataset, major reforms appear to have been more frequent in product markets than in labor markets in the last decades, and were predominantly implemented during the 1990s and 2000s.

This paper describes a new database of major labor and product market reforms covering 26 advanced economies over the period 1970-2013. The focus is on large changes in product market regulation in seven individual network industries, employment protection legislation for regular and temporary workers, and the replacement rate and duration of unemployment benefits. The main advantage of this dataset is the precise identification of the nature and date of major reforms, which is valuable in many empirical applications. By contrast, the dataset does not attempt to measure and compare policy settings across countries, and as such is no substitute for other publicly available indicators produced, for example, by the ILO, the OECD or the World Bank. It should also be seen as work in progress, for researchers to build on and improve upon. Based on the dataset, major reforms appear to have been more frequent in product markets than in labor markets in the last decades, and were predominantly implemented during the 1990s and 2000s.

Interacting Labor and Product Market Regulation and the Impact of Immigration on Native Wages

Regulation and Labour Market Performance

Product and labor market reforms are needed to lift persistently sluggish growth in advanced economies. But reforms have progressed slowly because of concerns about their distributive and short-term economic effects. Our analysis, based on new empirical and numerical analysis and country case-studies shows that most labor and product market reforms can improve public debt dynamics over the medium-term. This because reforms raise output by boosting employment and/or labor productivity. But the effect of some labor market reforms on budgetary outcomes and fiscal sustainability depends critically on business cycle conditions. Our evidence also suggests that some temporary and well-designed up-front fiscal stimulus can help enhance the economic impact of reforms. In the past, countries have used fiscal incentives in the past to facilitate reforms by alleviating transition and social costs. But strong ownership of reforms was crucial for their successful implementation.

Reforming Labor and Product Markets: Some Lessons from Two Decades of Experiments in Europe

This paper evaluates European structural reforms over the last 20 years, in light of economic theory predictions about interactions between labor and product market reforms. Reforms in labor markets occur at higher frequencies than in product market, which are, however, more coherent. These asymmetries can be explained by the nature of political obstacles to reforms in the two domains. Labor market reforms can exploit institutional trade-offs; notably, reforms can trade labor market flexibility with state-provided unemployment insurance and can be applied only to new entrants in the market without affecting the set of regulations applied to existing workers. These two-tier strategies are infeasible in product markets, since incumbent firms can easily drive away new entrants. In product markets, however, it is possible to shift responsibilities to supranational authorities, resisting pressures of national lobbies.

A Narrative Database of Major Labor and Product Market Reforms in Advanced Economies

The paper estimates the dynamic macroeconomic effects of labor and product market reforms on output, employment and productivity, and explores how these vary with prevailing macroeconomic conditions and policies. We apply a local projection method to a new dataset of major country- and country-sector-level reform shocks in various areas of labor market institutions and product market regulation covering 26 advanced economies over the past four decades. Product market reforms are found to raise productivity and output, but gains materialize only slowly. The impact of labor market reforms is primarily on employment, but it varies across types of reforms and depends on overall business cycle conditions—unlike that of product market reforms. Reductions in labor tax wedges and increases in public spending on active labor market policies have larger effects during periods of slack, in part because they usually entail some degree of fiscal stimulus. In contrast, reforms to employment protection arrangements and unemployment benefit systems have positive effects in good times, but can become contractionary in periods of slack. The economy’s response to such reforms is significantly improved when they are accompanied by fiscal or monetary stimulus.