Effects Of Labor Market Institutions Research Articles

Right of association and new business entry: country-level evidence from the market sector.

Labor market institutions (LMIs) could enable new firm entry by lowering burdens to attracting and retaining human capital or restrict new firm entry by increasing concerns of additional demands on ventures facing liabilities of newness and smallness. In this study, we focus on the LMI of the right of association, and whether its relationship with new business entry depends on the vertical ordering of bargaining (represented in the centralization of collective bargaining) or the horizontal synchronization of wage-setting (represented in the coordination of wage-setting). In a panel of 44 countries covering the period 2005-2019, we find that the right of association in the market sector is positively associated with new business entry; however, with increasing centralization of collective bargaining, the association becomes negative. Coordination of wage-setting does not significantly affect the relationship between the right of association and new business entry. The results are robust to accounting for both serial correlation and cross-sectional correlation in the panel regressions and carry implications for policymakers regarding the effects of LMIs on new business creation.

Macroeconomic Shocks and Employment in sub-Sharan Africa: Do Labour Market Institutions Matter?

Abstract The effects of macroeconomic shocks and labour market institutions on employment in sub-Saharan African countries are examined in this study. Using a sample of 27 SSA countries for the period 2007 to 2018, both linear and interactive relationships are investigated. The results show that labour market institutions (especially in terms of wage flexibility) dampen the effects of shocks on modern employment but amplify the effects of shocks on informal employment in the sampled SSA countries. There is also evidence that shocks themselves (especially those emanating from the external sector) do not matter for a huge proportion of employment changes in SSA countries. Rather, the direct effects of shocks on employment are more profound in the formal sector. The study therefore concludes that reforming the informal sector will help to ensure the effectiveness of labour market institutions in mitigating the negative impacts of external shocks on employment in SSA.

The effect of labor market institutions and macroeconomic variables on aggregate unemployment in 1990–2019: Evidence from 22 European countries

AbstractThis paper investigates the long-run effect of a wide set of labor market institutions (LMIs) and macroeconomic variables on aggregate unemployment for a panel of 22 European countries over the period 1990–2019. First-difference feasible generalized least squares model, Prais-Winsten regression with panel-corrected standard errors, two-step generalized method of moments estimation of the fixed effects, and fixed-effects regression with Driscoll and Kraay standard errors are estimated. The results suggest that employment protection legislation, wage bargaining coordination and centralization, minimum wage, and immigration inflows are significantly and negatively associated with the aggregate unemployment rate. Conversely, union density, product market regulation (PMR), and tax wedge have a positive and significant correlation with unemployment rate. The impact of corporate tax rate and government size is mostly positive. Moreover, the interaction between LMIs does matter and may sometimes change the interpretation of some reforms taken in isolation. Stronger wage-setting institutions may offset the negative impact of PMR and the tax wedge. Macroeconomic variables are generally consistent with the major literature and do not change LMIs interpretation. Among macroeconomic factors, capital accumulation plays the most important role in reducing the unemployment rate. Finally, my findings suggest the implementation of economic policies consistent with Keynesian theory and all those economists—such as Solow (1990)—who look at the labor market as a social institution.

Labor Market Institutions and Wage-led Growth: A Panel Cointegration Approach

This study analyzes the long-term effect of labor market institutions, such as minimum wage and union density, on inequality, investment, growth, and consumption, by using data of the member countries of the Organization for Economic Co- operation and Development since the 1970s. Labor market institution variables are used to test arguments on wage-led growth theory. Panel cointegration approach was used to investigate the long- term effect of these variables. Results of panel cointegration test show that variables of labor market institutions are not robustly correlated to macroeconomic outcomes in the long run. This condition is not in accordance with the findings of the proponents and critics of wage-led growth. No robust evidence exists to show that increasing minimum wage and union density, which are representative policies for wage-led growth, are correlated to inequality, labor income share, consumption, investment, or growth in the long run. Estimation results of this study suggest that the empirical basis of support and criticism for wage-led growth theory is weak.

Gender inequalities in the initial labour market experience of young Europeans

PurposeThe purpose of this paper is to investigate gender differences in employment status trajectories of young Europeans during their initial labour market experience, and the way in which they are affected by some labour market institutions.Design/methodology/approachThe empirical analysis is based on EU-SILC longitudinal data (waves 2006–2012), and focusses on young people aged 16–34. Monthly information on self-declared employment statuses for 36 months is used to define “employment status trajectories”. Young people are observed in two different phases: the first three years after leaving education (first phase) and a three-year window, starting around four years after the end of education (2nd phase). Multinomial logit models are used to estimate the probability of following different trajectory types as a function of individual characteristics, macroeconomic conditions and institutional indicators.FindingsResults show that, in the first phase, women and men face on average the same difficulties in entering the labour market. When controlling for the presence of children, non-mothers have higher chances than men to enter rapidly and successfully into the labour market, whereas young mothers have the same chances. In contrast, in the second phase women experience more fragmented pathways than men, even if they do not have children. A less stringent regulation on dismissals of employees with regular contracts could enhance women’s employment opportunities in the school-to-work transition, but it would have detrimental effects for both men and women in the subsequent years. On the contrary, a more stringent regulation on the use of temporary contracts would have beneficial effects for women, with no adverse effects for men.Originality/valueThe paper contributes to the literature in several ways. First, it takes a broader perspective on youth labour market integration by considering two phases of individuals’ initial working life. Second, it combines an explicit attention to the first “significant” employment experience with a focus on individual trajectories, by adopting a new method to group trajectories. Third, it shows how the effects of labour market institutions vary by gender, highlighting the importance of considering gender-specific consequences when discussing or adopting labour market reforms.

The Life-cycle Profile of Worker Flows in Europe

In this paper, we first provide a comprehensive account of the relationship between cross-country differences in aggregate employment and disaggregated differences in worker flows along the life cycle. To this end, we use survey micro-data for 31 European countries, and estimate the life-cycle profiles of transition probabilities across employment, unemployment and nonparticipation for each country. We develop a decomposition measuring the contribution of these transition probabilities to aggregate employment differences. We find substantial cross-country heterogeneity with respect to the role of worker flows out of each labor market state. Next, we relate this heterogeneity to cross-country differences in labor market institutions. Our analysis emphasizes age-dependent vs. age-independent labor market policies, and policies related to family formation, planning and dissolution. By going well beyond the study of differences of aggregate worker flows, we obtain a rich picture of the employment effects of labor market institutions.

Union Influence on Wage and Change in Employment Rate in an Overlapping Generations Economy

The effect of labor market institutions on the unemployment rate has been widely studied in macroeconomic dynamics. Union influence is one of the most important issues in the labor market institutions. Thus, this study investigates the effects of union influence on wages with regard to employment dynamics using an overlapping generations model with closed economy. We assume a wage setting equation that is discussed in the existing literature and we consider an economy in which unemployment exists. The model shows that high upward pressure on wages leads to low employment rates not only in the steady state but also on the equilibrium path.

Revisiting the Okun relationship

ABSTRACTOur article revisits the Okun relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985–2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers but also it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate but it will also have the distributional effect of lowering youth unemployment.

The Structure of Hiring Costs in Germany: Evidence from Firm‐Level Data

This paper analyzes the structure of hiring costs of skilled workers in Germany. Using detailed and representative firm‐level data on recruitment and adaptation costs of new hires, we find that average hiring costs amount to more than 8 weeks of wage payments (€4700). The structure of hiring costs is convex, as an increase in the number of hires by 1 percent increases hiring costs by 1.3 percent. We find moderate effects of labor market institutions on the magnitude but none on the structure of hiring costs. Furthermore, we provide evidence in favor of monopsony power in the German labor market.

Revisiting Okun's Relationship

Our paper revisits Okun's relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985-2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers, it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate, it will also have the distributional effect of lowering youth unemployment.

College wage premiums and skills: a cross-country analysis

Workers with a college degree earn substantially more than workers with no such degree. Using recent data from 22 OECD (Organization for Economic Cooperation and Development) countries, we estimate this college wage premium at 28 per cent for male full-time working employees, on average, ranging from 18 per cent in Sweden to 50 per cent in the Slovak Republic. This premium is largely explained by the higher skill levels of graduates from higher education combined with their use of these skills at work, as well as the match with job requirements for this skill proficiency and skill use. We find no effect of labour market institutions (e.g. the employment protection legislation or the coverage rate) on cross-country differences in the college wage premium. However, we find that cross-country variation in this premium is related to the relative supply of higher educated workers. Moreover, we find evidence that cross-country differences in the college wage premium are related to the degree to which educational credentials signal skills.

Revisiting Okun's Relationship

Our paper revisits Okun's relationship between observed unemployment rates and output gaps. We include in the relationship the effect of labour market institutions as well as age and gender effects. Our empirical analysis is based on 20 OECD countries over the period 1985-2013. We find that the share of temporary workers (which includes a high and rising share of young workers) played a crucial role in explaining changes in the Okun coefficient (the impact of the output gap on the unemployment rate) over time. The Okun coefficient is not only different for young, prime-age and older workers, it decreases with age. From a policy perspective, it follows that an increase in economic growth will not only have the desired outcome of reducing the overall unemployment rate, it will also have the distributional effect of lowering youth unemployment.

Effects of labour-market institutions on employment, wages, R&D intensity and growth in 27 OECD countries: From theory to practice

We extend the existing literature by focusing on the implications of labour-market institutions on (i) relative (un)employment of unskilled labour, (ii) wage inequality in favour of skilled labour, (iii) R&D intensity, and (iv) the economic growth, and by considering 27 OECD countries. By linking the unskilled wage to the skilled one, due to the indexation of social benefits to per-capita income, we accommodate the observed short-medium-long run paths of the four variables – in (i), (ii), (iii) and (iv) – in all countries between 1991 and 2008. On average, the obtained results also reveal that: Continental-European countries present the highest skilled-labour share in production; Eastern-European countries record the highest size of R&D spillovers; Nordic countries have the highest share of skilled labour in the total population, R&D intensity, and proportionality factor related to the generosity of the (unemployment) benefits; and Eastern-Asian countries have the highest unskilled-labour share in production.

Does labour regulation affect technical and allocative efficiency? Evidence from the banking industry

In light of the ongoing restructuring of the European banking industry and the challenging macroeconomic environment, banks have increased their efforts to reduce operating costs. Yet, the institutional features that affect banks’ ability to adjust costs and in particular personnel expenses, which comprise a significant part of banks’ non-interest cost structure, have not been adequately studied. This paper investigates the effect of labour market institutions and regulations on bank performance in 15 European countries over the period 2005–2010, using the Fraser index for labour regulation and its disaggregated sub-components. We propose a novel methodology to measure performance, based on the seminal work of Kumbhakar and Tsionas (2005), which allows the estimation of technical and allocative efficiency and the examination of the effect of labour market regulations in a single stage. Results indicate the existence of a positive relationship between the liberalisation of EU labour markets and allocative efficiency, while the effect on technical efficiency appears to be negative, although not statistically significant. When looking at the disaggregated components of the labour index, we further confirm that different forces are at play.

Credential and Skill Mismatches Among Tertiary Graduates: The effect of labour market institutions on the differences between fields of study in 18 countries

ABSTRACTThis study provides new empirical evidence about tertiary graduates’ overeducation, by analysing the influence of labour market institutions on the incidence and distribution of the phenomenon across fields of study. In particular, the analyses focus on the level of employment protection, the regulation of access to the so-called liberal professions, and the propensity of welfare states to hire skilled workers. Data from two comparative surveys – REFLEX and HEGESCO – are used, and a wide set of information is employed to split overeducation in two forms of suboptimal allocation of individuals in the labour market: credential and skill mismatches. The first term refers to the mismatch between formal educational credentials and job requirements, whereas the second term refers to the mismatch between the skills acquired through education and those needed to perform a job. Results suggest that field of study differentials vary by country and that welfare and labour market institutions illuminate these cross-national variations. Moreover, the results support the claim that it is necessary to distinguish between credential and skill mismatches, showing that these institutional factors do not always affect them similarly.

Are outsiders equally out everywhere? The economic disadvantage of outsiders in cross-national perspective

Despite intense policy debate over labour market dualization, research on cross-country differences in the ‘outsider penalty’ is still in its infancy. In this article, we assess two explanations for cross-national variation in the disadvantages affecting temporary workers (‘outsiders’), measured by the chances of regular employment and risk of unemployment: their socio-economic composition and the effect of labour market institutions (employment protection regulation and the strength of unions). Our findings suggest that variation in the outsider penalty is not caused by the socio-economic composition of the outsider group, but rather by the institutional setting of a country. Outsiders are more disadvantaged in countries with strong employment protection legislation. In contrast, strong unions do not reinforce but mitigate insider/outsider divides in at least some dimensions, a finding that adds to recent research about unions’ reorientation towards mobilizing outsiders.

Labor Market Institutions and Their Impact on Shadow Economies in Europe

This paper analyzes the role of labor market institutions in explaining developments of shadow economies in European countries. We use several alternative measures of the shadow sector to examine the effects of labor market institutions on shadow sector in two specific regions, the old and the new European Union member states. Comparing alternative measures of the shadow sector allows a more granulated analysis of the effects of labor market institutions. Our results indicate that the one institution that unambiguously increases shadow economy is the strictness of employment protection legislation. Other labor market institutions have less straightforward and statistically robust effects, and their impact often differs in the old and new EU member states.

Labor market institutions and firms’ location choices

The paper evaluates the empirical effects of labor market institutions (LMI) on foreign direct investment (FDI) decisions using an individual dataset describing French firms’ expansion strategies in OECD countries over 1992–2002. First, we provide evidence that labor market institutions do matter in location decisions. Precisely, we show that labor market rigidity significantly reduces the country’s attractiveness for foreign investors. Yet, the effect is of limited magnitude compared to FDI determinants related to the country’s market potential or supply access. Second, we go deeper in the precise role of various LMI dimensions. In line with the literature, we find that stringent employment protection laws have a dampening effect on the location probability. Besides, we show that this is not the only dimension that matters. In particular, we find that the generosity of the unemployment benefit system plays a significant negative role on the country’s attractiveness, even once the role of employment protection is controlled for.

Sharing risk within and across countries: the role of labor market institutions

This paper studies the effect of labor market institutions on within- and cross-country risk sharing, using a model of international trade in risky assets modified to include a subset of agents, labor-owners who do not access financial markets, and employment security provisions. Labor market, institutions, by promoting within-country risk-shifting arrangements between agents with or without, access to financial markets, reduce the fluctuations of non-tradable labor incomes and amplify the, fluctuations of capital incomes. Capital flows become more volatile across countries, and if the, configuration of labor markets differs across countries, capital-owners bear the burden of systematic, undiversifiable world aggregate uncertainty.

Are corporatist labour markets different? Labour market regimes and unemployment in OECD countries

Abstract.Empirical studies on the unemployment effects of labour market institutions show contradictory results. One explanation is that these institutions affect unemployment differently depending on the regime in which they operate. Because of good labour relations, institutional complementarities and a trade‐off between external and internal flexibility, they produce distinctive effects in corporatist regimes. Based on empirical evidence from 20 OECD countries over the period 1985–2008, the author finds that, in corporatist labour markets, strict employment protection legislation reduces unemployment, and unemployment benefits have no negative effect. He also shows that high real interest rates, low capital accumulation and restrictive fiscal policy during recessions increase unemployment.