Labour Market Regulation and Youth Unemployment in the EU-28

Giorgio Liotti

doi:10.1007/s40797-021-00154-3

Abstract

The rise of youth unemployment has been one of the most serious problems which policymakers have had to deal with over the last two decades. Neoclassical economic theory suggests that the deregulation (i.e. higher flexibility) of the labour market stimulates firms to hire young people and—therefore—reduces youth unemployment. The aim of this study is to empirically test the validity of this hypothesis, analysing data on youth unemployment and labour market regulation index (LMRI) for 28 European countries in the period between 2000 and 2018. The empirical results—using two different econometric techniques (time and fixed effects that allows to take into account the presence of heterogeneity of countries in the model and pooling mean group (PMG) estimator providing results about the short and long run relationship between LMRI and youth unemployment)—do not provide evidence in support of the neoclassical hypothesis. In particular, the effect of higher flexibility of the labour market is negative and statistically significant (at 1%) only when a dummy variable for the Eastern country group is included in the model. Vice-versa, the paper shows that higher economic growth and higher investment in active labour market policy represent the key variables to reduce the youth unemployment. In conclusion, the paper raises many doubts that the introduction of flexibility measures in itself can represent a useful tool to counteract the increase of youth unemployment in Europe.

Highlights

The research concerning the reasons for the strong rise in unemployment— mainly in the Western European countries—has been at the centre of social, political and economic debate since the end of the 1980s (Lazear 1990; Layard et al 1991; Pissarides and McCaster 1990)
Labour market reforms have been introduced in many European countries since the later 1990s (Tridico 2018), with the aim of achieving three main objectives: (1) the introduction of “atypical” jobs to facilitate the entry of young people in the labour market; (2) lowering of the hiring and firing costs, allowing firms to increase their competitiveness on international markets and adjust the labour demand according to the business cycle (Zemanek 2010; Bernal-Verdugo et al 2013; Lucifora et al 2005; Ferreiro and Serrano 2013); (3) reducing employment security (Moreira et al 2015), aiming to reduce the protection that insider workers enjoy, preventing the labour market segmentation described by insider–outsider theory1 (Lindbeck and Snower 1988; Blanchard and Summers 1986)
This study analysed the effect of higher labour market flexibility on youth unemployment, taking into account data on 28 European countries in the 2000–2018 period

Summary

Introduction

The research concerning the reasons for the strong rise in (youth) unemployment— mainly in the Western European countries—has been at the centre of social, political and economic debate since the end of the 1980s (Lazear 1990; Layard et al 1991; Pissarides and McCaster 1990). Labour market reforms have been introduced in many European countries since the later 1990s (Tridico 2018), with the aim of achieving three main objectives: (1) the introduction of “atypical” jobs (fixed and part-time contracts) to facilitate the entry of young people in the labour market; (2) lowering of the hiring and firing costs, allowing firms to increase their competitiveness on international markets and adjust the labour demand according to the business cycle (Zemanek 2010; Bernal-Verdugo et al 2013; Lucifora et al 2005; Ferreiro and Serrano 2013); (3) reducing employment security (Moreira et al 2015), aiming to reduce the protection that insider workers enjoy, preventing the labour market segmentation described by insider–outsider theory (Lindbeck and Snower 1988; Blanchard and Summers 1986)

Objectives

Findings

Discussion

Conclusion