عواقب ناشی از انعطاف پذیری بازار کار: شواهد پنل بر اساس بررسی داده ها

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984–1990. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long-run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence.

One of the biggest challenges in economics today is to explain what causes European unemployment. Commentators on the European situation often blame poorly designed labor market institutions, a view that sometimes goes by the ugly name of “Eurosclerosis”. Economists advising governments on these issues share more or less the same diagnostic: Regulations such as hiring and firing restrictions faced by firms, as well as the generous welfare state that protects the unemployed, are behind the differential labor market performances of Europe and America. A number of countries have taken this view seriously. Great Britain and France are just two examples of countries that followed the economists’ advice and reduced hiring and firing restrictions in the mid-1980s to combat high unemployment. This view of the labor market has also inspired large reform programs in the less developed world, where unemployment has recently increased. In fact, deregulation of the labor market is part of what the IMF and the World Bank often call “second-generation reforms”.1 Since unemployment brings real misery to people's lives, and job security provisions often involve delicate redistribution issues between richer firm owners and poorer workers, one would think that economists giving such advice know what they are doing. More precisely, one would think that there are hundreds of papers studying whether more flexibility does in fact reduce a country's unemployment rate in practice. Sadly, this is not the case. To our knowledge, there is one panel study on the effects of labor market flexibility across countries (Lazear, 1990). And only a couple of cross-section studies, like the early one of Bertola (1990) based on evidence for 10 countries or that in the OECD Jobs Study (1994) based on 21 observations.2Addison and Grosso (1996) revise Lazear's data and obtain different estimates with respect to unemployment (they find no evidence favoring the hypothesis that severance pay increase unemployment).3Gregg and Manning (1997) review some of the available evidence on the effects of labor market flexibility and argue that it is “much less persuasive than is commonly believed”, and that the profession's “faith in the merits of labor market de-regulation is misplaced” (p. 395). There is, perhaps, no experience more sobering to an economist than to review the state-of-the-art evidence on the effects of firing costs and to reflect on the social costs of unemployment. The contribution of this paper is empirical. We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the 7-year period covering 1984–1990. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. We also use the new summary measure of the parameters of the unemployment insurance system compiled by the OECD in 1994, which constitutes a significant improvement on previous benefit data available in the profession. We then present an empirical analysis of the effect of flexibility on a number of labor market variables that follows and extends the contributions of Lazear (1990). Controlling for country and time fixed effects, and using dynamic panel data techniques developed by Arellano and Bond (1991), we find evidence that relaxing job security provisions increases the employment rate and the participation rate. The estimated effects seem large. The fixed effects estimate tells us that, if France were to reform its labor markets and make them as flexible as the American, its employment rate would increase by 1.6 percentage points.4 This is equivalent to 14% of the employment rate gap between the two countries. In order to express this effect in terms of GDP per capita, we note that it implies an increase in total employment of 2.8%. In the short run, the estimated effects are stronger for females than for males, although interestingly both groups have roughly similar long run coefficients. There is also evidence that a more flexible labor market leads to lower unemployment rates and to a lower proportion of long-term unemployed in the unemployment pool. The effect of unemployment benefits on these variables is less clear-cut. As a general point, we think it is reassuring that, in spite of using such a different approach, our results are not out of line with those obtained by Lazear. We also document the basic correlation of flexibility with inflows and the rate of unfilled vacancies, and review the hypotheses that inflexible labor markets produce “jobless recoveries” and introduce more unemployment persistence. The main empirical evidence on the effect of labor market flexibility that we have available today is presented in Lazear (1990). He uses data on severance pay and periods of notice required before employment termination for 22 developed countries for the period 1956–1984, and finds some evidence that they have a negative relationship with the employment rate and a positive one with the unemployment rate. For example, Lazear finds that the amount of money paid to the worker as severance enters negatively and significantly in univariate regressions on country means (18 observations) explaining the employment rate, the participation rate and the number of hours worked per week. The coefficient on severance pay in the unemployment regression is positive but insignificant, however. In univariate regressions explaining the unemployment rate and the number of hours worked that include country dummies (468 observations), the coefficient on severance pay keeps its sign and turns significant. It is insignificant, however, when explaining the employment rate or the rate of labor force participation (where it also changes sign). Lazear points out a number of limitations in these data. Amongst them is the fact that information on one type of worker (blue collar with 10 years of service) is used as a proxy for the entire system. Second and more significantly, information on two types of institutions (amount of severance pay and months of advance notice before dismissal) are used to proxy for a large number of employment regulations that affect the flexibility of the labor market.5 Clearly, flexibility of the labor market could be affected without showing up in these two series. Third, it does not allow for the fact that countries differ in the degree of enforcement of these laws, and that other, perhaps informal, aspects may be more important than the written laws. Lastly, Lazear points out that “for the most part, rules change once or twice during the period per country, so much of the mileage is cross-sectional rather than time-series” ( Lazear, 1990, p. 708). Yet, it is the best data that economists have available to study a most important set of issues. The flexibility data used in this paper come from the World Competitiveness Report (WCR). 6 The WCR requests the opinion of a number of top and middle managers (on average 1,531 each year) on the flexibility enterprises have to adjust things like compensation and employment levels to economic realities in each of the countries covered. By its nature, these data avoid some of the objections raised to the data used by Lazear. For example, it uses information provided by business people who, presumably, are in a position to judge what aspects of flexibility laws actually affect business conditions. Furthermore, it passes simple validation tests. For example, it correlates well with the index of “strictness of employment protection legislation” constructed for the OECD Jobs Study (1994), arguably the most complete measure available, for the 1 year where both types of data are available (1989). There are, of course, limitations to the data we use. The time series dimension of the panel is considerably shorter than that of Lazear's (7 versus 29 years). Importantly, the question asked is more vague than what ideally an economist would like to use. Furthermore, a lower set of answers in one country may simply reflect the fact that people there use a different cardinal ranking than people in other countries. Though some of these objections can be tackled in the empirical section, the fact remains that subjective responses should be treated with caution. However, we believe the topic to be of such economic and social significance, and the data that so far has been available to the profession to be of such poor quality, that a willingness to experiment with survey data is justified. 7 In Section 2, we discuss briefly some of the theoretical background for our study, present our empirical strategy and explain the data used in the paper. Section 3 presents the empirical results while Section 4 concludes.

One of the biggest challenges in economics today is to explain what causes unemployment. Economists who study European unemployment often point out that it must be labor market regulations. This view has been adopted by international institutions like the World Bank and the IMF, which now insist that countries make their labor markets more flexible when providing them with financial support. The evidence available to support this view consists of cross-sections, like that of Bertola (1990) with 10 countries, or the OECD (1994) with 21, and the panel constructed by Lazear (1990). Because the latter focuses on laws for two aspects of flexibility that change little over time, these data are almost like another cross-section. There is, perhaps, no experience more sobering to an economist than to review the evidence we have to support policy recommendations on labor market flexibility and to reflect on the social, economic and personal costs of unemployment. We introduce a new panel data set on labor market flexibility based on surveys of business people in 21 OECD countries during 1984–1990. One of the virtues of the data is that they originate from people who have to make their living out of roughly understanding how stringent job security provisions actually are in their countries. The use of a subjective index allows respondents to capture movements in very different kinds of regulations that affect the flexibility of labor markets, such as provisions on part time work, severance payments, interpretation (and enforcement) of what constitutes legal cause for termination and so on. These regulations imply very different costs to normal business operations and would be extremely difficult to document with hard data. There are, of course, limitations to the data we use. The index is more vague than what an economist would ideally like to use. By its nature, our flexibility index does not allow us to distinguish between the effect of the different regulations that are active. And although we present some time series/cross-section validation exercises, the fact must remain that data that are subjective in nature must be treated with care. However, we believe the relevance of the subject matter and the evidence available to the profession to be so out of balance that a willingness to experiment with survey data is justified. We follow Lazear (1990) and use a parsimonious, reduced form approach to study the effect of flexibility on labor market performance. Our main findings are: 1. Controlling for country and time fixed effects, and using dynamic panel data techniques developed by Arellano and Bond (1991), we find that countries with more flexible labor markets have higher employment rates and higher rates of participation in the labor force. The results on employment are inconsistent with Bentolila and Bertola (1990) and Bertola (1990) and are consistent with the predictions in Hopenhayn and Rogerson (1993). 2. These results are stronger in the female labor market, although the long-run effects are approximately similar across both male and female sub-groups. 3. A potential drawback of these data is their contamination by the stage of the business cycle. When the economy is in recession firms are more likely to be firing than hiring and so employment protection legislation may impose binding constraints on firms. If managers’ responses to our survey question were in fact in the direction of greater inflexibility at such times, even though the parameters of the system have not changed, then the interpretation of our results would be different. Consequently, we repeated all our regressions controlling for the state of the business cycle (the change in GDP). The results are unaffected. We also note that it we would be hard to explain some of our coefficients if the contamination of the flexibility data with the business cycle was the main factor driving our results. 4. The estimated employment effects seem to be large. A conservative estimate is as follows: if France were to increase the flexibility of its labor markets to US levels, the employment rate would increase by 1.6 percentage points, almost 14% of the actual difference in employment rates between the two countries. In order to estimate the effect of flexibility on French GDP per capita, we note that this increase in flexibility would lead to a 2.8% increase in French total employment. Of course, this says nothing about the convenience of such a reform. For that we would need information on the benefits (in terms of employment security, wages and so on) of flexibility, a fact sometimes forgotten in policy debates. 5. The paper only finds some evidence that countries with more flexible labor markets have lower unemployment rates and a lower proportion of long term unemployed. The problem of the endogeneity of labor market institutions is addressed but still must remain an open issue. 6. In spite of some inconsistencies, the results on inflows and vacancies are interesting. Controlling for country and year fixed effects, we do not find evidence of positive effects of flexibility on inflows. We do however find evidence that more flexibility is associated with lower rates of unfilled vacancies and that there are more vacancies in a recovery that occurs in a country with high flexibility. 7. Lastly, we explore some alternative hypotheses related to flexibility that have been suggested in the literature. First, we examine the jobless recovery hypothesis. We find evidence that Okun's law is steeper in countries with very flexible labor markets (as suggested in Bertola, 1990). We also find evidence consistent with a second hypothesis tested by Bertola and suggested by Blanchard and Summers (1986) and Lindbeck and Snower (1989): that the dynamic structure of unemployment regressions is affected by flexibility. Controlling for country and time fixed effects, we find that unemployment is less persistent in countries with more flexible labor markets.