Market Rigidities Research Articles

On the interaction between exports and labor market regulation: Evidence from the MENA countries

Using a panel of MENA countries, this paper aims to examine the interaction between exports performance and labor market regulations on employment levels. The theoretical predictions on this literature show that the effects of exports in any given country can be altered by the nature of labor market regulations. Previous studies showed that trade liberalization was more likely to have a positive impact on employment rates in countries with flexible labor markets and vice versa, mainly because of how the labor market adjustment process to trade openness occurs. Our main findings how that labor market rigidity reduces the positive impact of exports on employment. Indeed, rigid labor markets may limit the easiness of creating new jobs that satisfy the increased labor demand in expanding sectors when a country experience an increase in its exports.

To Whom Does Outward FDI Give Jobs?

This study used the Korean industry-level data for the period of 2007–2014 to decompose the effects of outward foreign direct investment (OFDI) on overall domestic employment into the forms of OFDI, workers’ skill level and employment status. The main finding is that OFDI has no effect on the overall employment of permanent workers, while it is positively associated with the overall employment of temporary workers. These results possibly indicate that the MNEs initiating FDI, at least in Korea, prefer employing temporary workers rather than permanent workers when the success of their FDI is not clearly visible. Given the high degree of labor market rigidity in Korea, these results seem legitimate and self-explaining. Although there is little evidence that OFDI has an impact on overall domestic employment, especially for permanent workers, there does exist heterogeneous effects of OFDI on employment depending on the types of FDI, workers’ skill level and employment status.

Habitual entrepreneurs in the making: how labour market rigidity and employment affects entrepreneurial re-entry

We investigate the impact of country-level labour market regulations on the re-entry decision of experienced entrepreneurs, whereby they become habitual entrepreneurs. Multilevel logit models on entry decisions among 15,709 individuals in 29 European countries show that labour market regulations have a positive influence on the decision to re-enter into entrepreneurship. This positive impact is stronger among individuals holding wage jobs at the time of re-entry compared to those that do not. Our results indicate that novice and habitual entrepreneurs may respond very differently to labour market rigidity. We discuss and provide tentative explanations for these differences and outline potential policy implications.

FDI Deregulation Versus Labor Market Reform: a Political Economy Approach

This paper studies the political economy of foreign direct investment (FDI) in interaction with labor market policies. It analyzes the setting of reform focused on deregulating labor markets as a political compromise pressured by the lobbying of an industry lobby and a trade union. Using a common agency model of lobbying, we show that the interest group’s influence is socially distortive towards less deregulation. Also, our political economy framework shows that, for large countries, exogenous FDI liberalization policies lead to deregulation in the labor market. For small countries, such policies enhance more labor market rigidities.

Trade Openness Effects on Informality and the Real Exchange Rate Channel

The theoretical frameworks that explain the impact of trade openness on informal employment suggest an ambiguous effect that emphasises the importance of labour market rigidities. This has been verified in a few countries, based solely on microeconometric evidence. This study contributes to the literature by specifying a macroeconometric relationship between trade openness and informal employment that exploits the real exchange rate (RER) channel for a panel of 17 Latin American countries. The channel linking trade openness to informal employment is split into two stages. We identify that the ambiguous relationships across countries is explained by the first stage relationship between trade openness and the RER.

Labour Reforms and Social Welfare: The Developmental Debate

The much debated labour market reforms maintains the centre stage in the policy debate in India, caught in the vortex of the ‘Make in India’ campaign. The question posed by the author is how will labour law reforms address the concern of expanding employment and creating better quality employment for 78 percent of the work force in India, which do not fall within the ambit of labour laws and are classified as the unorganised sector. The second question posed is that if labour rigidities were an obstacle to increasing employment then reasons have to be traced for the significant increase in the share of contract workers in the total employment in the organised sector. Further if labour market rigidities were an obstruction, for employers to expand by hiring more workers, then the number of workers would have increased at least to a number less than 50 or 100 if the cause was to escape the implications of the labour laws since only numbers beyond this critical size of labour employed attract different laws to various degree. Thus to assess the complete picture, it is imperative to take a view of the interdependent drivers of growth like infrastructure, adequate power, access to credit etc. Most of all, the fact that more than 70 percent of workers in India earn marginal survival wage and are not protected by social security regulations, the proposed labour law reforms has the potential of increasing their vulnerabilities on account of the vagaries of globalisation.

Size Dependent Policies, Informality and Misallocation

We examine the effect of size-dependent policies in developing economies by focusing on a set of regulations that are applicable to firms with 20 or more formal employees in Peru. Firms can adjust to the regulations by (a) reducing their size, (b) shifting employment composition, or (c) splitting into subunits that fall below the regulatory threshold. We show that these actions are consistent with observed discontinuities in the distributions of firm size and employment composition. We extend the framework proposed by Garicano et al. (2016) to model and estimate the Peruvian economy and perform counterfactual exercises. Size-dependent regulations are costly for the economy, especially in the presence of labor market rigidities, and lead to lower aggregate wages, profits, and output. We also find that access to informal labor does not mitigate the economic impact of the size-dependent regulations, as the increase in informal employment is largely offset by a decline in formal employment.

Trade openness, labour market rigidity and economic growth: A dynamic panel data analysis

AbstractThe rapid liberalisation of trade policies since the 1990s has brought additional attention to the role of trade as an engine of economic growth. Although an abundant literature addresses the relationship between openness and economic growth, the real effect of trade liberalisation is still ambiguous and undetermined. Most previous studies have ignored the selection effects of strict labour regulations on international trade. The main objective of this study is to measure the role of labour regulations in moderating the contribution of trade to economic growth among 30 Organisation for Economic Co-operation and Development countries for the period 2006–2013. In doing so, we employ a one-step Generalised Method of Moments system estimation method. Our results reveal that openness to trade does not have a robust and significant effect on growth. However, the interaction of openness with strict labour regulations enhances the contributions of trade to growth.

Labor market rigidity, social policies and the labor share: Empirical evidence before and after the big crisis

This paper provides evidence of the impact of three important and general policies shaping the degree of labor market rigidity on the labor share: welfare expenditures, government expenditures on active labor market programs, and passive labor market measures. It analyses the impact of regulation, such as the intensity of employment protection, and evaluates whether trade unions and minimum wage institutions play a role in the relationship between all measures and the labor share. The labor income share has experienced a declining trend since the mid-1970s in most advanced economies, and the existing literature found little if no correlation of this decline to general labor market characteristics. However, the present paper finds that some institutions are correlated to the downward trend, depending on the welfare system adopted, and that welfare and employment protection counteract the decline. Moreover, many countries saw an upsurge in their labor share after the burst of the financial crisis. Evidence of whether the effect of the policies weakened or reinforced the labor share after 2007 is reported.

A DSGE Model of Slovakia with Frictional Labor Market and Monetary Regime Switch

AbstractThe aim of this paper is to examine the dynamical and structural characteristics of Slovakia using a dynamic stochastic general equilibrium model augmented with search and matching mechanisms and other forms of frictions. I implement a switching mechanism to account for the monetary regime change in Slovakia in 2009. My focus lies in the investigation of labor market rigidities that affect the macroeconomic variables. I also examine the long term impact of the recession in 2009 on the Slovak economy. My findings are as follows. Firstly, based on parameter estimates, I identify significant labor market frictions present in the Slovak Republic. Secondly, my results capturing the historical evolution of key macroeconomic variables support the view that the recession in the examined small open economy was mainly caused by shocks originating in the foreign sector. Thirdly, the monetary authority can influence the labor market variables through its transmission channels relatively effectively; and lastly, I discovered that the recession decreased the Slovak economy’s flexibility. While the results of estimations on two sub-samples are quite similar for most of the structural parameters, an increase in price and wage stickiness is observable.

Homeownership and entrepreneurship: a search-and-matching model and a panel analysis in Italy

Housing market rigidities or inefficiencies can damage labour market outcomes and increase unemployment. Also, a related research stream claims that higher homeownership rates are associated with fewer new businesses. Using a search-and-matching model, this theoretical paper investigates the inexplicably neglected relation between homeownership and entrepreneurship by distinguishing two channels through which homeownership affects the creation of enterprises and jobs. The first channel looks at the job search intensity of homeowners, while the second considers the link between the benefit of being a homeowner and the revenues of a new enterprise that is run by the homeowner. The main result of this paper is that the intrinsic preference for homeownership plays a key role in the establishment of new businesses, while in general homeownership does not encourage the development of existing enterprises. Indeed, a panel analysis in Italy confirms the main finding of the search-and-matching model, namely outright homeownership encourages the creation of new small businesses.

University – industry collaboration in R&D: the role of labor market rigidity

We investigate how R&D university – industry collaboration (R&D UIC) is influenced by labor market rigidity. While it is well‐established that an educated and skilled workforce will facilitate R&D UIC, another aspect of these alliances has been under‐researched: the role of labor market rigidity, in particular the difficulties employers face in hiring and firing workers. We hypothesize that the size of the R&D labor pool in a country will encourage R&D UIC, and that the ease with which employers are legally allowed to hire and fire will directly and indirectly influence R&D UIC. Integrating data from various sources, we test our model on a sample of 73 countries for which information on the size of the R&D labor pool and labor market regulations are available. We also conduct a robustness test using a different proxy for R&D labor pool on a larger sample of 109 countries. Results confirm the strong link between a country's R&D labor pool and R&D UIC, as well as direct negative impacts of hiring and firing rigidity and an indirect negative impact of hiring rigidity. The findings have implications for managers, policy makers, and researchers of R&D collaboration between universities and industry.

Labour Market Rigidity and Habitual Entrepreneurship

Focusing on individuals with prior entrepreneurial experience, this study investigates the impact of firms’ external stimuli at the country level - labour market regulations- on the re-entry decision of the experienced entrepreneurs into self- employment and become a habitual entrepreneur. The analyses using multi-level modelling techniques show that the rigidity of labour market regulations does not influence the re-entry decision of individuals with prior entrepreneurial experience directly. The hypothesised relationship is moderated by individuals’ work status at the time of re-entry. Individuals holding wage jobs are more likely to engage in entrepreneurial activity once again when they face stringent labour market regulations than those who are not employed. To provoke further thinking and research in the field of habitual entrepreneurship, I discuss and provide tentative explanations to the observation that novice and habitual entrepreneurs react differently to labour market regulations.

Synergies in Labour Market Institutions: the Nonlinear Effect of Minimum Wages on Youth Employment

Empirical evidence on the effect of minimum wages on youth employment is inconclusive, with studies pointing to negative, positive or insignificant effects. In trying to explain some of the conflicting evidence, this research paper examines synergies of minimum wages with other labour market institutions using an unbalanced panel dataset of 19 OECD countries over 1985–2013. Institutions that enforce labour market rigidity, such as unemployment benefits and union density, are found to exacerbate the negative effect of minimum wages on youth employment, while government expenditure on training programmes for the unemployed dampen it. This finding of significant synergy effects indicates that panel data models which omit interactive terms between minimum wages and institutions might be misspecified. In addition, the analysis suggests that the negative effect of minimum wages is most severe in rigid labour markets with high unemployment benefits and union density. Therefore, policymakers need to consider the full spectrum of institutions they face before adjusting minimum wages.

Labor Market Rigidity and the Factor Content of Disaggregated Trade Patterns

This article examines the power of labor market rigidities (LMR) to influence export flows of 113 countries from 1995 to 2013 for up to 5018 different goods. Since LMR can alter the productive use of factors in the production process, I expect that the interplay of a country's LMR and the good-specific factor intensities determine comparative advantage. Based on a multi-sector Ricardian trade model, I estimate a gravity like equation to show that countries with a rigid labor market tend to export more of capital-intensive production and less of goods that have a high global sales volatility. The impact of LMR on natural resource-intensive and human capital-intensive goods depends on countries' stage of development and the aggregation level of trade date, among others. My estimates consider a wide array of high-dimensional control variables such as exporter- and importer-good fixed effects, Heckscher-Ohlin forces, and bilateral gravity forces.

Entrepreneurial spawning and knowledge-based perspective: a meta-analysis

Entrepreneurial spawning is the transitory process by which employees of an existing firm leave their employment to initiate a new business venture. There is a lack of consensus regarding the predictors of entrepreneurial spawning. We used meta-analysis to analyze 28 studies (with 128 effect sizes) to examine the predictors of entrepreneurial spawning. Based on knowledge-based perspective, we hypothesize that employee characteristics (age, education, and job position) and parent firm characteristics (firm age, firm performance, and firm diversity) are significantly related to entrepreneurial spawning. We identified two inverted U-shaped relationships (age and tenure with entrepreneurial spawning) based on our meta-analytic hierarchical multiple regression analyses. Based on labor market rigidity perspectives, we also examined how country region (North America versus Europe) moderates the relationships between employee characteristics and entrepreneurial spawning and between parent firm characteristics and entrepreneurial spawning. Our paper provides theoretical and practical implications.

Technology Trade with Asymmetric Tax Regimes and Heterogeneous Labor Markets: Implications for Macro Quantities and Asset Prices

The international diffusion of technology plays a key role in stimulating global growth and explaining co-movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude toward innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy exibility and higher labor market rigidity. We develop a two-country model – where both countries rely on R&D and adoption – to study the short-run and long-run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, it helps explaining the differences in macro quantities and equity returns observed in the international data.

Credit-Supply Shocks and Firm Productivity in Italy

The Italian economy has been struggling with low productivity growth and bank balance sheet strains. This paper examines the implications for firm productivity of adverse shocks to bank lending in Italy, using a novel identification scheme and loan-level data on syndicated lending. We exploit the heterogeneous loan exposure of Italian banks to foreign borrowers in distress, and find that a negative shock to bank credit supply reduces firms' loan growth, investment, capital-to-labor ratio, and productivity. The transmission from changes in credit supply to firm productivity relates to labor market rigidities, which delay or distort the adjustment of firms' desired labor and capital allocations, and thereby reduce firms' productivity. Effects are stronger for firms with higher capital intensity and external financial dependence.

Credit-Supply Shocks and Firm Productivity in Italy

The Italian economy has been struggling with low productivity growth and bank balance sheet strains. This paper examines the implications for firm productivity of adverse shocks to bank lending in Italy, using a novel identification scheme and loan-level data on syndicated lending. We exploit the heterogeneous loan exposure of Italian banks to foreign borrowers in distress, and find that a negative shock to bank credit supply reduces firms' loan growth, investment, capital-to-labor ratio, and productivity. The transmission from changes in credit supply to firm productivity relates to labor market rigidities, which delay or distort the adjustment of firms' desired labor and capital allocations, and thereby reduce firms' productivity. Effects are stronger for firms with higher capital intensity and external financial dependence.

Regional Labour Market Mobility. A Network Analysis of Inter-Firm Relatedness

Labour market rigidity is known to hamper the proper adjustment of an economy, thus, making it less resilient to shocks. This paper investigates the characteristics and resilience of the regional labour flow network in Veneto, a region famous for its industrial districts and the expertise of its workforce. A unique database of inter-firm worker mobility is used and the made-in-Italy relatedness to other industries is quantified. Descriptive results suggest that permanent-contract workers are more mobile within-sector than fixed-term contractors. The latter are more mobile across sectors. A finer disaggregation of the made-in-Italy industries shows that textile, food and woodwork are highly related to leisure-retail, logistics-wholesale and agriculture. These results can orient policy-making in getting faster labour reallocation. Network analysis establishes a number of stylised facts about labour flow networks, in particular, a hierarchical organisation of flows and a preference for workers to move from low-connected to high-connected firms and vice-versa, i.e. disassortativity. Unlike previous research, this paper identifies clusters of a non-spatial nature, that are, based on the intensity of labour flows. Regression analysis shows that labour mobility, both in and out, is beneficial for firms. However, being located inside labour clusters negatively affects firm performance. Interestingly, when these clusters include MNEs, they benefit. These results combined suggest that variety of connections prevails over standardisation.