European Union Dual Labour Markets: Consequences and Potential Reforms

Abstract

Abstract This chapter provides an overview of a growing literature on the emergence of dual labour markets and their persistence in some EU countries, as well as the impact that dualism has on a large range of labour market dimensions including, among others, job and worker flows, (overall and youth) unemployment, wage setting, training, labour mobility, household formation, and technology adoption. A distinctive feature of the chapter is that it places the accumulated evidence on these issues in a general equilibrium framework, which helps understand why dual labour markets have performed so poorly since 2008, and also to identify promising avenues of research for the near future. The chapter also evaluates recent reforms and reform proposals (single and unified labour contracts) to eliminate the undesirable consequences of excessive dualism in the labour market. Introduction This COEURE Survey deals with the consequences of dual labour markets, namely labour markets where workers are entitled to different employment protection depending on the contract they hold, and where these differences are large. The effect of dualism on several labour-market dimensions has been widely analysed in the literature but many of these issues have strongly reemerged during the recent crisis due to the poor performance of countries subject to strong dualism. In this survey we review the main lessons drawn from past experience with these labour market regimes, where they originate from, why they are so difficult to change, why they have failed during the Great Recession and the subsequent sovereign crisis, what reform proposals have been posed and which ones are more likely to work. In addition to reviewing the accumulated stock of knowledge on these issues, we place them in a general equilibrium framework to understand which ones constitute the most promising avenues of research for the near future. The rest of the survey is organized as follows. Section 2.2 deals with the historical origins of dual labour markets. Section 2.3 considers conditions under which labour contracts become too different, leading to optimal versus nonoptimal arrangements of stability and flexibility in the labour market. Section 2.4 looks at the performance of dual labour markets since the onset of the Great Recession. Section 2.5 documents the case of Spain, as an epitome of a dual labour market.