Download Bocconi University and Fondazione Rodolfo Debenedetti Tito Boeri Is the Honeymoon Over?

Is the Honeymoon Over?
Partial Labour Market Reforms nd
the Growth of Low Productivity Jobs
in Europe
Tito Boeri
Bocconi University and Fondazione
Rodolfo Debenedetti
Outline
• Taking stock of reforms in labour/product
markets
• Why more labour than product market reforms?
• Two-tier reforms. Do they pay in terms of
employment? For how long?
2
Acceleration of labour
market reforms in recent years
Average Number of Reforms per Year and Country
1985-1990
1991-1996
1997-2002
Employment Protection Legislation
0.05
0.14
0.31
Non-Employment Benefits
0.09
0.33
0.82
* Reforms increasing flexibility and rewards from labour market participation.
Source: fRDB Social Reforms Database
3
Deceleration of product
market reforms in recent years
Average Number of Reforms
In 7 product markets
1985-1990
1991-1996
1997-2002
1.21
3.32
1.40
* Reforms increasing competition in airline, TLC, electricity, gas, postal
service, road and railways flexibility.
Source: fRDB Social Reforms Database
4
Some Convergence in EPL?
5
…but not in Product Market
Regulations
6
Why is it so difficult to reform product
markets?
• Reforms leaving aside incumbents as in labour
markets (e.g., temporary vs. fixed term
contracts) are not feasible
• Benefits of reforms are spread across many
individuals, while losses are concentrated
• Attitude to pursue self-interest as a worker rather
than as a consumer (information gathering)
• However possible to delegate authority to
(blame?) someone else (Brussels?): progress of
Single Market
7
Reforms of EPL are marginal
8
while Reforms of Product Markets
are Radical
Increasing Competition
Decreasing competition
1991-1996
1997-1998
Total per row
Of which decreasing (%)
Airlines
Marginal
0
5
13
0
0
0
18
100
Telecom
Radical
Marginal
3
4
9
45
0
9
0
0
0
0
0
0
12
58
100
100
Radical
Electricity Marginal
0
1
4
4
8
3
0
0
0
0
0
1
12
9
100
88.89
Gas
Radical
Marginal
1
0
3
8
2
0
0
0
0
0
0
1
6
9
100
88.89
Post
Radical
Marginal
1
6
1
5
0
2
0
1
0
0
1
0
3
14
66.67
92.86
Radical
Railways Marginal
3
0
3
0
0
0
0
0
0
0
0
0
6
0
100
-
Radical
Marginal
0
11
5
0
0
1
0
0
0
0
0
0
5
12
100
100
Radical
Total per column
Average per year
4
34
5.07
1
93
16.03
1
39
19.05
0
1
0.02
0
0
0
0
3
1.05
6
170
12.14
100
97.65
Road
1985-1990
1991-1996
1997-1998
1985-1990
9
Summarising
• More activity and some cross-country
convergence in labour market reforms
• Driven almost entirely by reforms of
temporary contracts
• Deceleration of reforms in product
markets
• Role of political obstacles. Reforms “at
the margins” are often the only ones
which are politically feasible
10
Outline
• Taking stock of reforms in labour/product
markets
• Why more labour than product market reforms?
• Two-tier reforms. Do they pay in terms of
employment? For how long?
11
Closing the Employment Gap with
the US and Japan?
(employment rates)
Source: European Commission
12
Progress towards Lisbon
The distance from Lisbon
80
70
60
50
40
30
20
10
0
Empl rate 1995 Empl rate 2003
13
Consistent with Theory?
• Lazear neutrality. Under:
 competitive product market (w=MP)
 competitive labour market (no unions)
 flexible wages (no wage floors)
 risk-neutral agents (u(w)=w), interested
only in average wages over the period
EPL consisting of pure severance has no
effects on employment and wages
14
and under rigid wages
• Two countries both with rigid wages, but
EPL only in Rigidland ( R), not in Flexiland
(F )
• Same technologies: Y=Ai log L
• Ai can be Ag (good times)>Ab (bad times)
• Probability p and (1-p) respectively
• Wages fixed at w
15
Flexiland
L maximizes F = Ai log L – w L
Implying w=Ai/L thus under good times
higher employment
Employment variations
L=(Ag-Ab)/w when from bad to good
L=-(Ag-Ab)/w when from good to bad
Average LF = =(pAg+(1-p)Ab))/w
16
Rigidland
Too costly to adjust L to shocks. Firms
choose average L and stick to it
L maximizes R = (p Ag+(1-p)Ab) log L –
wL
Implying LR =(pAg+(1-p)Ab))/w =LF
17
Thus
• Average employment levels are the same
in F and R
• More fluctuations in F than in R
• With risk-neutral agents, country F is more
efficient as under any state of the world,
firms make higher profits
• But if workers are not risk-neutral, they
are better off in Rigidland
18
Two-tier systems:
The Honey Moon Effect
Employment in Good
Times
Temporary
Permanent
Employment in
Bad Times
PRE REFORM
TRANSITION
POST REFORM
19
Two-tier systems
• Flexibility only at the margin
• Under good times a “buffer stock” is builtup. Hiring of Temps
• Average productivity declines (under DRS)
• More turnover, accommodated by TEMPs
20
Anatomy of Employment Growth
Italy 1995-2003
80
70
60
50
40
30
20
10
0
1995
1996
1997
1998
permanent employees
self-employed workers
1999
2000
2001
2002
2003
temporary employees
unpaid family workers
OECD data.
21
Anatomy of Employment Growth
Ireland 1995-2003
80
70
60
50
40
30
20
10
0
1995
1996
1997
1998
permanent employees
self-employed workers
1999
2000
2001
2002
2003
temporary employees
unpaid family workers
OECD data.
22
Anatomy of Employment Growth
Spain 1995-2003
80
70
60
50
40
30
20
10
0
1995
1996
1997
1998
permanent employees
self-employed workers
1999
2000
2001
2002
2003
temporary employees
unpaid family workers
OECD data.
23
Anatomy of Employment Growth
Portugal 1995-2003
80
70
60
50
40
30
20
10
0
1995
1996
1997
1998
permanent employees
self-employed workers
1999
2000
2001
2002
2003
temporary employees
unpaid family workers
OECD data.
24
From jobless growth to
growthless job creation
25
Final Remarks
• Contrary to economic theory reforms of
EPL are paying off in terms of employment
growth
• It may be because of honey-moon effect
• If so, it is temporary
• And there are indications that is fading
away
• Find soon other trophies to exhibit on
Lisbon?
26