Labour Market Institutions and Employment Security. by Eugeniusz Kwiatkowski University of Lodz Chair of Macroeconomics

Transcription

1 Labour Market Institutions and Employment Security by Eugeniusz Kwiatkowski University of Lodz Chair of Macroeconomics 1

2 Learning objectives After this lecture you should know: what employment security (e.s.) is, why e.s. is threatened, main labour market institutions (l.m.i.), how l.m.i. influence upon e.s. 2

3 Structure: 1. The Concept of Employment Security 2. Employment and Unemployment Fluctuations in some Countries 3. Labour Market Institutions and their Objectives 4. Should the Labour Markets Be Regulated or Deregulated? 3

4 Definition of e.s. the absence of fear of employment loss (S. Dasgupta, ILO, 2001) individuals have the confidence they will be able to continue their employment career 4

5 E.S. and Job Security Job security: protection against dismissals and major changes of working conditions The higher J.s., the higher e.s. 5

6 E.s. implies: lower firings, higher hirings, longer duration of employment contracts more stable levels of employment in a business cycle 6

7 Why is e.s. important? leads to income security and higher living standards of individuals increases workers loyalty and discipline (Sengenberger, 1992) encourages investment in workers training and skill development Question: are there any negative effects? 7

8 Why is e.s. threatened? business cycles imply labour demand fluctuations technical progress implies reductions in employment in some branches and occupations increasing role of temporary employment contracts implies higher rates of firings and hirings 8

9 Tendencies in Employment and Unemployment 9

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14 Summary 1 Employment Group 1 countries in which strong decreases of employment during the crisis were observed (high negative semi-standard deviation>3): Negative semistandard deviation Positive semistandard Country deviation Spain 7,15 0,00 Greece 5,28 0,55 Portugal 5,05 0,24 Slovenia 3,33 0,49 Iceland 3,20 0,50 14

15 Summary 1 Employment Group 2 countries in which strong decreases and strong increases of employment were observed (high negative semi-standard deviation>3; high positive semi-standard deviation>2): Negative Positive semistandarstandard semi- Country deviation deviation Estonia 6,01 4,20 15

16 Summary 1 Employment Group 3 countries in which no decreases of employment during the crisis were observed (negative semi-standard deviation=0): Negative semistandard deviation Positive semistandard deviation Country Poland 0,00 2,87 Switzerland 0,00 2,91 Australia 0,00 3,79 Mexico 0,00 5,18 Chile 0,00 7,69 Turkey 0,00 7,69 Israel 0,00 10,40 16

17 Summary 1 Employment Group 4 countries in which weak decreases and weak increases of employment were observed Negative semistandard deviation Positive semistandard deviation Country Denmark 2,62 0,78 Slovakia 2,42 2,34 United States 2,16 1,09 Hungary 1,86 0,41 Finland 1,65 1,32 Netherlands 1,32 0,78 Euro area 1,19 0,69 Czech Rep. 1,18 1,01 Italy 1,14 0,60 EU 27 1,11 0,71 Japan 1,10 0,00 Sweden 0,91 2,21 OECD 0,89 1,13 United Kingdom 0,75 0,69 Canada 0,72 2,57 New Zealand 0,49 1,35 France 0,47 0,92 Belgium 0,28 1,75 Norway 0,25 2,99 Austria 0,15 1,58 Korea 0,14 2,48 Luxembourg 0,13 5,39 Germany 0,09 2,36 17

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23 Summary 2 Unemployment Group 1 countries with high unemployment rates: Average rate of Country unemployment Spain 19,34 Slovakia 12,40 Estonia 12,02 Greece 11,99 Portugal 11,86 Turkey 10,68 Hungary 10,04 23

24 Summary 2 Unemployment Group 2 countries with low unemploy ment rates: Average rate of Country unemployment Euro area 9,36 EU 27 8,88 France 8,78 Poland 8,76 United States 8,45 Chile 8,11 Italy 7,95 Finland 7,79 Sweden 7,77 OECD 7,73 Belgium 7,63 Canada 7,51 United Kingdom 7,37 Germany 7,17 Slovenia 7,05 Israel 6,65 Denmark 6,52 Czech Rep. 6,33 Iceland 6,32 New Zealand 6,24 Australia 5,18 Mexico 5,17 Luxembourg 4,89 Japan 4,83 Austria 4,34 Switzerland 3,90 Netherlands 3,76 Korea 3,55 Norway 3,17 24

25 General conclusion: Our present labour markets are full of: uncertainty employment fluctuations That is why the idea of employment security is of big value. 25

26 How can e.s. be increased? Different remedies liberal keynesian new views economics institutional economics 26

27 Labour Market Institutions (LMI): Employment Protection Legislation (EPL) Minimum Wages Tax Wedge Passive and Active Labour Market Policies 27

28 Influence of the L.M.I. upon Employment and Unemployment: LMI Economic Units (Employers, Employees, Unemployed) Decisions of the Economic Units Employment and Unemployment Changes 28

29 LMI (1): EPL Definiton of EPL: Restrictions imposed on the employer s ability to use labour (Addison, Teixeira, 2001). Obligatory restrictions governing the redundancies (Cahuc, Zylberberg, 2004). Standards and procedures used by employers in the event of layoffs (Boeri, van Ours, 2011). 29

30 Fundamental objectives of EPL: to increase the stability of employment to increase the security of workers incomes 30

31 Measurement of EPL: Commonly used synthetic EPL indicator developed by the OECD contains 21 sub-indices concerning: regular contracts, temporary contracts, collective dismissals. 31

32 Table 1. Process of aggregation of EPL indicator according to the OECD methodology Source: Venn D. (2009), Legislation, collective bargaining and enforcement: Updating the OECD employment protection indicators, s

33 Table 2. EPL indicators in selected countries in 2008 and the change in indicators between 2000 and 2008 Indicator calculated according to methodology. Source: OECD Indicators of Employment Protection, Countries Regular contracts Temporary contracts Collective dismissals Synthetic EPL indicator Change in EPL indicator in * Australia 1,37 0,79 2,88 1, Austria 2,19 2,29 3,25 2, Belgium 1,94 2,67 4,13 2,61 0 Canada 1,17 0,22 2,63 1,02 0 Czech Rep. 3 1,71 2,13 2, Denmark 1,53 1,79 3,13 1, Finland 2,38 2,17 2,38 2, France 2,6 3,75 2, Germany 2,85 1,96 3,75 2, Great Britain 1,17 0,29 2,88 1, Greece 2,28 3,54 3,25 2, Hungary 1,82 2,08 2,88 2, Ireland 1,67 0,71 2,38 1, Italy 1,69 2,54 4,88 2, Japan 2,05 1,5 1,5 1,73 0 Korea 2,29 2,08 1,88 2, Mexico 2,25 4 3,75 3,23 0 Netherlands 2,73 1,42 3 2, New Zealand 1,54 1,08 0,38 1, Norway 2,2 3 2,88 2, Poland 2,01 2,33 3,63 2, Portugal 3,51 2,54 1,88 2, Slovakia 2,45 1,17 3,75 2, Spain 2,38 3,83 3,13 3, Sweden 2,72 0,71 3,75 2, Switzerland 1,19 1,5 3,88 1,77 0 Turkey 2,48 4,88 2,38 3, United States 0,56 0,33 2,88 0,

34 Figure 5: Synthetic EPL indicator in the OECD countries in 2000 and 2008 (0=the lowest restrictiveness; 6=the highest restrictiveness of EPL) 4 3,5 3 2,5 2 1, ,5 0 Source: OECD Indicators of Employment Protection, 34

35 The impact of the EPL on e.s.: controversies 1. more restrictive EPL leads directly to higher e.s. because employment fluctuations are weaker 2. more restrictive EPL can imply higher cost of labour and irrational allocation of resources in enterprises, leading to lower labour demand 35

36 The debate in the literature Impact of EPL on the labour market depends on: degree of flexibility in wages and working time 36

37 Assuming high degree of flexibility in wages and working time: High restrictiveness of EPL (high severance payments) has a neutral impact on the level of employment and unemployment, as severance costs are included in the wages set at a reduced levels (Lazear, 1990). 37

38 Assuming rigid wages: High restrictiveness of EPL (high redundancy costs) reduces employment and unemployment fluctuations in the business cycle (automatic stabilisation effect) but diminishes corporate profits lowering the demand for labour (leverage effect) (Greenwald, Stiglitz, 1995). 38

39 Figure 7. Employment protection and unemployment Unemployment Total effect Leverage effect Automatic stabilisation effect EP* Employment Protection (EP) Source: M. Malul, M. Rosenboim, S. Tal (2011). Leverage effect increase in unemployment due to diminishing profits. Automatic stabilisation effect suppression of unemployment fluctuations. 39

40 6. Econometric analysis Statistical data: 26 OECD countries (excluding: Chile, Estonia, Iceland, Israel, Luxembourg, Mexico, Slovenia, Turkey). Quarterly data from the Stats.OECD database, seasonally adjusted. Time horizon: I quarter 2008-IV quarter observations (unbalanced panel). 40

41 Model I: Fixed effects panel model: ln( Z i, t ) 0i 1'ln( Zi, t 1) 1'ln( PKB i, t ) 2'ln( RWage i, t 1) 1'ln( PKB i, t ) EPLi, t 2'ln( PKB i, t ) EPL 2 i, t i, t where: Z i,t employment in i-th country in period t, Z i,t-1 employment in i-th country in period t lagged by 1 quarter, PKB i,t GDP in i-th country in period t, RWage i,t-1 real wages in i-th country in period t lagged by 1 quarter, EPL,i,t synthetic EPL indicator level in i-th country in period t. Estimated using Arellano-Bover General Method of Moments. 41

42 Model II: bc Fixed effects panel model: GExp PKB i, t 0i 1' ln( PKBC i, t ) 2'ln( AzCi, t ) 3'ln 1'ln( PKBC i, t ) EPLi, t 2'ln( PKBC i, t ) i, t EPL 2 i, t i, t where: bc i,t cyclical component of the unemployment rate in i-th country in period t, PKBC i,t cyclical component of GDP in i-th country in period t, AzC i,t cyclical component of activity rate in i-th country in period t, - ratio of government expenses in GDP in i-th country in period t, EPL,i,t synthetic EPL indicator level in i-th country in period t. Cyclical component obtained using Hodrick-Prescott filter. Estimated using Panel Data Least Squares. 42

43 Results: Table 8. Estimates of parameters of the models for selected OECD countries Model 1 Model 2 Number of countries 26 Number of countries 26 Time horizon Time horizon Dependent variable Ln(Z) Dependent variable bc Param. T Param. T Ln(Z(-1)) 0.796*** Ln(PKBC) *** Ln(PKB) 0.259*** 8.47 Ln(PKBC)*EPL 0.749*** 5.75 Ln(PKB)*EPL ** Ln(PKBC)*EPL *** Ln(PKB)*EPL ** 2.22 Ln(AZC) 0.093*** 3.57 Ln(RWage(-1)) *** Ln(Gexp/PKB) ** Total panel observations Standard error of regression Standard deviation of dependent variable 410 Total panel observations Standard error of regression Standard deviation of dependent variable J-statistic R^ Sargan test p-value Adjusted R^ Rejection of the null hypothesis of significance of estimates at the level: *** p <0.01. ** p <0.05. * p <0.1. Source: own calculations. 43

44 Elasticity of employment relative to GDP Figure 8. Elasticity of employment relative to GDP and the EPL level 1 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0, EPL Source: own calculations. 44

45 Sensitivity of cyclical rate of unemployment to changes in cyclical component of GDP 0-0,5 Figure 9. Sensitivity of cyclical rate of unemployment to changes in cyclical component of GDP and the EPL level ,5-2 -2,5-3 -3,5 EPL Source: own calculations. 45

46 Conclusions Level of EPL restrictiveness is diversified among countries: High: Spain, Portugal, France, Greece, Low: United States, United Kingdom, Ireland. Theoretical considerations on the impact of the EPL on the labour market allow us to formulate the hypotheses of existence of U- shaped relationship between unemployment and the level of EPL restrictiveness. 46

47 The relationship is an effect of mechanisms, which: directly weaken employment fluctuations, diminish the demand for labor due to falling profits. The results of empirical studies confirm this hypothesis. The optimal level of EPL index in times of the negative economic shock is about 2. 47

48 Labour Market Institution (2) Unemployment benefit system (UB) income function motivation function 48

49 Generosity of U.B. depends on: eligibility conditions level of benefits (replacement ratios = UB/Wage) duration of benefits 49

50 Generous U.B. result in: U.B. - hypotheses better protection of incomes higher outflows of persons from employment to unemployment weakening the intensity of job search by the unemployed increasing the reservation wage 50

51 U.B. evidence from the Polish labour market unemployed who get U.B. are more passive in the labour market, unemployed who get U.B. delay their transitions from unemployment to employment unemployed who get U.B. look for job offers with higher wages 51

52 Conclusions 1. LMI are of big importance for e.s., 2. The influence of LMI on e.s. is not simple. Labour market effects of the LMI are different. 3. Liberal and very restrictive regulations of LMI can have negative impacts on e.s. One should look for moderate (optimal) restrictiveness of the LMI 52

53 Thank you for your attention 53