Low Employment Protection Research Articles

Flexicurity, education and optimal labour market policies

AbstractThe paper provides a theoretical rationale for flexicurity policies, consisting of low employment protection, generous unemployment insurance and active labour market programmes. Education efforts give access to high productivity firms, more likely to survive and thus exposing less their workers to unemployment risk. Activation programmes support reallocation from risky and unproductive to safer and more productive firms, reducing unemployment. Low employment protection can provide incentives for self‐insurance against unemployment risk through education, mitigating the moral hazard cost of unemployment insurance and activation programmes. The paper identifies conditions for flexicurity to be optimal and confronts theoretical predictions to the data.

Measuring macroeconomic uncertainty: A cross-country analysis

This paper constructs internationally consistent measures of macroeconomic uncertainty. Our econometric framework extracts uncertainty from revisions in data obtained from standardized national accounts. Applying our model to post-WWII real-time data, we estimate macroeconomic uncertainty for 39 countries. The cross-country dimension of our uncertainty data allows us to study the impact of uncertainty shocks under varying degrees of employment protection legislation. Our empirical findings suggest that the effects of uncertainty shocks are stronger and more persistent in countries with low employment protection compared to countries with high employment protection. These empirical findings are in line with a theoretical model under varying firing cost.

Measuring Macroeconomic Uncertainty: A Cross-Country Analysis

This paper constructs internationally consistent measures of macroeconomic uncertainty. Our econometric framework extracts uncertainty from revisions in data obtained from standardized national accounts. Applying our model to quarterly post-WWII real-time data, we estimate macroeconomic uncertainty for 39 countries. The cross-country dimension of our uncertainty data allows us to identify the effects of uncertainty shocks on economic activity under different employment protection legislation. Our empirical findings suggest that the effects of uncertainty shocks are stronger and more persistent in countries with low employment protection compared to countries with high employment protection. These empirical findings are in line with a theoretical model under varying firing cost.

Knockin’ on heaven’s door? Reframing the debate on temporary employment and wages: evidence from Europe

AbstractThis article reframes the debate on the consequences of flexibilization in European labour markets focusing on the unexplored impact of temporary employment on occupational wages for permanent workers. Exploiting the variation in the temps’ density within occupation and age groups across European countries between 2003 and 2010, we find that temporary contracts negatively affect occupational average wages for insiders’ workers. These results are still robust using a dynamic system based on generalized method of moments (GMM-SYS) to account for potential endogeneity issues. We also explore the existence of heterogeneity across different occupational clusters and institutional settings. Our estimates indicate that the knock-on effect is large in countries with low employment protection legislation and it is driven by occupations characterized by untechnical work logics.

Employment Protection and Unemployment Benefits: On Technology Adoption and Job Creation in a Matching Model

AbstractWe analyse the effects of different labour‐market policies (employment protection, unemployment benefits, and payroll taxes) on job creation and technology choices in a model where firms are matched with workers of different productivity and wages are determined by ex post bargaining. The model is characterized by two intertwined sources of inefficiency, namely a matching externality and a hold‐up externality associated with the bargaining strength of workers. The results depend on the relative importance of the two externalities and on worker risk aversion. “Flexicurity”, meaning low employment protection and generous unemployment insurance, can be optimal if workers are sufficiently risk‐averse and the hold‐up problem is relatively important.

The Political Consequences of Outsider Labour Market Status in the United States: A Micro‐level Study

AbstractThis article contributes to recent research that seeks to understand the political consequences of ‘outsider’ labour market status. There is an emerging consensus that labour market outsiders have systematically different policy preferences and display systematically different political behaviour to securely employed ‘insiders’ in Europe. Yet the political consequences of outsider status in the USA are less clear. They may be expected to differ from those that have been documented in the European context, because: (1) the USA is characterized by low employment protection of insiders; and (2) there is evidence that Americans are more reluctant than Europeans to hold governments responsible for personal economic hardship. We therefore use the General Social Survey to examine how outsider labour market status is related to voting behaviour and to social policy preferences in the USA. We find that the concept of ‘labour market outsider’ – as conventionally operationalized – holds little explanatory power in the American context. Disaggregating the outsider category, our results suggest that the political consequences of outsider labour market status may be contingent on individual beliefs about government responsibility.

Internal Devaluation and Labor Market Outcomes: Evidence from Latvia

This paper analyzes the policy response and labor market adjustment of Latvia, which faced the most severe recession in Europe and globally. Latvia’s adjustment and recovery from the 2008 economic crisis represents “a rare case study”, which “has been an object of intense attention” (Blanchard et al., 2013) as country’s authorities, despite many experts’ recommendations, decided to maintain its currency peg and adjust through fiscal austerity and internal devaluation implementing major structural reforms. Three years later Latvia returned to a positive growth path and in 2014 joined the Euro zone. The main question in the literature is whether this adjustment represents a success story and can provide a lesson for other countries in the Euro area. We provide details on the adjustment in the Latvian labor market employing individual level data over the years 2002 to 2012. We show that with flexible labor markets, weak unions and relatively low employment protection, adjustment takes place predominantly at the extensive margin since it is driven by flows from permanent wage employment to unemployment. Underemployment constitutes another important adjustment channel, while the evidence for informal employment is more mixed. Wage regressions suggest that job mobility is not associated with increased labor productivity during and immediately after the crisis. We also identify groups particularly affected by the crisis and provide suggestions for the right mix of policy interventions.

On the potential interaction between labour market institutions and immigration policies

Using data on migration flows for a sample of 15 OECD countries over the period 1980-2006, we analyse the effect of unemployment and labour institutions such as employment protection legislation, coverage of unemployment benefits, minimum wages, union power and tax wedge on migration flows. We allow for interactions of these institutions with migration entry laws, as both affect equilibrium wages and employment in destination countries, influencing mobility decisions of immigrants. We find strong and negative effects of unemployment, employment protection and migration policy on flows. The negative effect of migration policy on flows is larger in countries with high than in countries with low employment protection. We find positive effects for minimum wages, unemployment benefits and union power. We deal with potential endogeneity of the variables of interest and report heterogeneous effects depending on the group of countries of origin and destination.

Analysing the uneven development of private equity in Europe: legal origins and diversity of capitalism

Based on the literature on the Diversity of Capitalism (DoC) and Legal Origin (LO), this paper examines the role of institutional configurations in the uneven development of Private Equity (PE) in 18 European countries. The paper shows that developed stock markets, the ability of limited partners (insurance companies) to invest in LBO funds and low employment protection are more important determinants than investor protection in the case of LBO investments. However, VC investments are found to be positively associated with investor protection but also with developed stock markets and favourable tax rates for managers. R&D tax incentives for investee companies are found to have a negative impact on VC investments, which are nonetheless promoted by public R&D expenditures. Even if national institutional configurations matter in explaining differences, as emphasised by LO and DoC, we observe a common trend in PE development and financialisation.

Does Greater Labour Market Flexibility Induce Greater Levels of Inequality within Europe?

Economic and social inequality is often thought to be contingent on varying degrees of labour market flexibility. This paper investigates this causal nexus and tests the correlation between flexibility and inequality for the European labour market by using evidence from European labour market institutions and data from several sources of inequality measures. We find that, on a pan-European level, there is overwhelming evidence that inequality levels do not fluctuate with varying degrees of labour market flexibility. On a country-specific level, we find several labour market characteristics that promote flexibility and equality. They include decentralized labour market institutions, low utilization of temporary work, and redundancy systems that unite low employment protection with high economic and social protection. Taken together, these factors enable the European labour market to buck the stylized perception that high labour market flexibility is coupled with high inequality.

Worker reallocation during Estonia’s transition to market

Based on consecutive labor force surveys, this study examines labor market dynamics during the first decade of the Estonian transition to market. The results show that, similar to other transition economies: Estonia’s employment and labor force was reduced; patterns of mobility profoundly changed – labor market flows intensified and previously nonexistent transitions emerged; and some groups of workers were disproportionally affected, chief among them the less educated and ethnic minorities. But Estonian fundamental free market reforms also produced labor market outcomes that differ significantly from those in other transition economies – above all, the intensity of worker and job flows in Estonia’s transition have surpassed those in most other transition economies. This was achieved by deliberate policies aimed at stimulating job creation and employment, above all by low employment protection and other policies geared toward increasing employability and strengthening the incentives of workers. Moreover, under the dynamic Estonian labor market adjustment, marginal groups have fared better than those in more protective labor markets of other transition economies.

The Political Economy of Corporate Governance

The paper analyzes the political decision that determines the degree of investor protection. We show that, in some circumstances, entrepreneurs and workers agree to trade low investor protection for high employment protection. The feasibility of this corporatist agreement depends on the distribution of wealth and on technological factors. Otherwise, a non-corporatist outcome will occur, featuring high investor protection and low employment protection. Therefore, our main prediction is that employment and investor protection is negatively correlated across countries. The model also predicts that the frequency of mergers and acquisitions is negatively correlated with employment protection. Both predictions are consistent with OECD evidence.