Wages, Productivity and the Paradoxes of Disappearing Mass Unemployment in Europe

Transcription

1 Wages, Productivity and the Paradoxes of Disappearing Mass Unemployment in Europe Tito Boeri XXIII National Conference of Labour Economics Brescia September 2008

2 1994 OECD Jobs Study The labour market has become particularly worrying in Europe ( ) in comparatively inflexible Europe, on the other hand, both relative employment and unemployment rates deteriorated. The high incidence of long-term unemployment in most EC countries is associated with low inflow rates into unemployment. The opposite relationship low incidence of long-term unemployment and high inflows into unemployment holds for North America.

3 Since then 126 as a % of the labour force 10 4,5 83 1, Unemployment EU 15 Long-Term Unemployment EU15 Source: Eurostat

4 Outline A European dream turning into a European nightmare Why? A closer look at transitions across labour market states Can we cheat the employment labour productivity tradeoff?

5 A European dream The Community shall have as its task ( ) to promote throughout the Community ( ) a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States. Rome Treaty, March 25, 1957

6 Convergence: Did the countries with high unemployment experience the strongest decline in unemployment? Log (Unemployment rate 1995 / Unemployment rate 1985) LU SE FI DE Log (Unemployment rate 1985) GR DK PT FR IT BE UK NL IE ES

7 Convergence AT DE PT GR BE FR NL UK SE DK IT FI ES IE Log (Unemployment rate 1996) Log (Unemployment rate 2006 / Unemployment rate 1996)

8 SE FI IT DE GR FR ES LU DK PT BE UK IE NL Log (Unemployment rate 1985) AT PT NL UK DK DE GR BE FR SE IT FI IE ES Log (Unemployment rate 1996) Log (Unemployment rate 1995 / Unemployment rate 1985) Log (Unemployment rate 2006 / Unemployment rate 1996)

9 Convergence in unemployment rates also within EU countries since the mid 1990s 2,5 (Nuts II regions) 2,0 1,5 1,0 0, Total Between countries Within countries Standard Deviation

10 It is not inactivity. It is employment Δ Empl ES IRE 0,3 0,25 0,2 0,15 - Δ U < Δ E FI NL SE FR IT UK DK 0 0,1 PT GR BE 0,05 AT DE Δ Unempl ,3-0,2-0,1 0 0,1 0,2 0,3-0,05 - Δ U > Δ E -0,1-0,15 Δ Empl = - Δ Unempl Unemployment and Employment expressed as a fraction of the working age population

11 Whatever measure of labour slack we take Measure of labour slack (in millions) From 1994 to 2000 unemployment declined by almost 5 million while the number of discouraged workers was stable at Unemployed workers Discouraged workers EU Countries: DK, BE, FR, IRE, IT, GR, ES, PT.

12 Lisbon is no longer a mirage Employment to population rates and the distance from the Lisbon Employment Target Lisbon target 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Denmark Netherlands Sweden Austria UK Finland Germany Ireland Portugal EU15 Spain France Luxembourg Belgium Greece Italy Source: Eurostat

13 The dream came true? Since 1995, the UE15 has almost 5 millions less people unemployed. Decline seen in 11 countries out of 15. Associated with 21 millions more jobs. Reducing cross-country and within country unemployment differentials. Supposedly more social cohesion, but

14 Europeans are unhappy Satisfaction with work or main activity in EU10 Fully satisfied as a % of respondents years Source: ECHP

15 Declining job satisfaction notably in the countries with the strongest unemployment decline Job satisfaction in EU Countries (% of employees expressing satisfaction with their working conditions) Denmark Finland Ireland UK Austria Belgium Luxembourg Germany Netherlands Sweden EU15 France Portugal Italy Spain Greece 50% 60% 70% 80% 90% 100% Source:

16 Characteristics of those satisfied Source: EWCS (1995, 2000 and 2005)

17 Reducing unemployment is not a popular business Under Berlusconi II (June May 2006) 1,354,320 jobs were created. Yet support for the Govt fell by 43%. Under Prodi II (May December 2007) 432,512 jobs were created. Yet consensus fell by 51%. Aznar had to go in spite of 4,982,050 jobs created and halving the Spanish unemployment rate.

18 Italy 60% 58% 56% 54% 52% 50% 12,5% 11% 9,5% 8% 6,5% 5% Employment as a % of population in working age Unemployment as a % of labour force Employment Unemployment

19 Spain 25% 20% 15% 10% 5% % 65% 55% 45% 35% Employment Unemployment Employment as a % of population in working age Unemployment as a % of labour force

20 Outline A European dream.. turning into a European nightmare Why? a simple explanation looking at flows Can we cheat the employment labour productivity tradeoff?

21 The simple explanation Lower unemployment could simply be related to demographics. Insofar as unemployment rates are higher for the young people than for the other age groups, the ageing of Europeans may involve a reduction of unemployment. Is this the reason why we no longer see mass unemployment in Europe?

22 No. It isn t Variation of Unemployment as a % of the Working Age Population IE IT NL FR DK SE PT ES GR FI BE AT LU -10% -8% -6% -4% -2% 0% 2% Total variation pure demographic effect

23 Also more migrants, but they have higher unemployment rates than natives Variation of Unemployment as a % of the Working Age Population SE ES PT NL LU IE GR FR FI DK BE AT -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% Migration effect Variation in U rate of natives and migrants

24 Alternative explanation: the costs of leaving Eurosclerosis 3 measures of mobility: 1. Unemployment turnover (proxy inflows and outflows) 2. Mobility Indexes for Transition Matrices 3. Job-to-job shifts among dependent employment

25 Unemployment declined with larger unemployment inflows Inflows/outflows as a % of the working age population Unemployment as a % of the labour force Inflows EU15 Outflows EU15 U rate EU15

26 Counterfactual Experiment EU 15 16% 14% 12% 10% 8% 6% 4% U rate EU15 U rate with constant 1980 Inflows U rate with constant 1980s Outflows Source: OECD

27 Let us look at transition matrices Example of Spain Employment t Unemployment t Inactivity t Employment t Unemployment t Inactivity t Yearly Average Out of 100 hundred unemployed, 45 find a job and 16 leave within the labour a year market. altogether another 39 remain unemployed.

28 Employment t Unemployment t Inactivity t Employment t Unemployment t Inactivity t Mobility Index = (S- tr(m))/(s-1) where S denotes the number of labour market states and tr(m) the trace of the transition matrix 25% In Spain more mobility across labour market states than years ago Mobility Index 37% Employment t-1 Unemployment t-1 Inactivity t-1 Employment t Unemployment t Inactivity t

29 What do these transitions imply in terms of the long-run unemployment rate? 12% 10% 8% 6% 4% 2% 0% Current Unemployment rate (EU) Unemployment rate in the long run (EU)

30 Increase in mobility and unemployment turnover at declining unemployment Average U turnover (%) 1,25 1,2 1,15 1,1 1,05 1 0,95 Average U rate (%) ,38 0,37 0,36 0,35 0,34 0,33 0,32 0,31 Average Mobility Index (% ) 0,9 5 0,3 0, ,29 av_u_turnover av_u_rate av_u_rate av_mob_index

31 The same with job-to-job shifts (as a percentage of employees in 9 EU countries) 14% 13% 12% 11% 10% 9% 8% 7% 6% Job to Job flows as % of total dependent employment U rates EU Countries: Be, Dk, Es, Fi, Fr, Gr, It, Lu, Pt. Notes: Proxy hirings minus inflows into employment

32 Why did mobility increase? Multivariate analysis (across countries and over time) of the determinants of various mobility measures Reduction in the generosity of Unemployment Benefits (UBs), and in the strictness of Employment Protection Legislation (EPL), notably for temporary contracts, increased mobility, however measured. Controlling for fixed country and year effects, GDP growth and lagged unemployment.

33 Dprobit regression, country and year dummies

34 Dprobit regression, Country and year dummies

35 Dprobit regression, Country and year dummies

36 Acceleration of reforms reducing EPL and UBs Unemployment Benefits Temporary contracts Countries: EU 14

37 The growth of temporary employment in Europe % of employees with temporary contracts Employment rate EU15 (%) % of employees with temp. contracts Employment rate EU 15

38 A port of entry? 1 % of employees with temporary contracts Age France Denmark Netherlands Italy Spain Portugal

39 or a dead end? Spain Permanent Fixed Term Contracts Contracts Unemployment Inactivity Permanent Contracts 97,2 1,1 1,0 0,7 Fixed Term Contracts 4,8 82,6 9,0 3,5 Unemployment 2,5 20,1 67,0 10,4 Inactivity 0,4 2,4 3,9 93,3

40 Temporary contracts: a longlasting phenomenon 35% 30% 25% 20% SPAIN ITALY Selfemployment 15% 10% 5% 0% Current share of FTC Long-run share of FTC Current share of FTC Long-run Share of FTC

41 Social cohesion? Dualism temporary-permanent contracts creates longstanding asymmetries (this is not properly social cohesion).

42 Why are also Permanent Workers Increasingly unhappy? Flexicurity trade-off. Value of employment is increasing in UBs (b) and EPL (F) via Nash bargaining (r+ δ ) W = b (1- β) + β y + r F+ δ U Decline in both b and F entails shift to a lower indifference curve

43 The flexicurity tradeofff b w 1 w0 F

44 The costs of job-to-job shifts and wage setting Present discounted value of a job W= w(1-γ)+ β[δα w(1-γ)+ δ (1- α) b+(1- δ) w(1+γ)] where γ is wage tenure profile, w is market wage, δ is job destruction rate, α is job creation rate and b is (flow) value of nonemployment Value of employment decreases the more with job destruction the steeper the wage-tenure profile d 2 W/(dδ dγ)= β(1-α)w < 0 Value of employment increases the less with job creation the steeper the wage-tenure profile d 2 W /(dα dγ)= - βδw < 0

45 Unconditional wage-tenure profiles (source ECHP) mean wage tenure Germany UK France Italy Spain Sweden

46 Outline A European dream.. turning into a European nightmare Why? A look at transitions across labour market states Can we cheat the employment/productivity tradeoff?

47 How to make Europeans happier about lower unemployment? Moving along the flexicurity tradeoff (but costly for public finance!) Providing tenure-tracks to stable jobs Reform wage setting (decentralisation, closer links wages-productivity) (of course) higher wages via higher labour productivity.

48 Can Europe increase both employment and productivity? 100% 90% 80% 70% 60% 50% 40% 1960 Hourly labour productivity (US=100) (left scale) Employment (in millions) Source: Groningen Growth & Development Centre, Total Economy Database

49 What do EPL and UB reforms do to labour productivity? On the job destruction margin: lower EPL reduces the number of low productivity jobs. This increases productivity. On the job creation margin: temporary jobs may discourage investment in human capital. Evidence of less training on-the-job of the TEMPs. Shorter duration UBs may reduce incentives to accept high productivity, risky jobs.this reduces productivity.

50 Can we make Europeans happier while cheating the tradeoff then? Tenure track to permanent contracts avoids segregation into temporary contracts. Good for human capital investment. Decentralised wage bargaining linking wages to productivity increases the latter via: i. incentives (micro literature) ii. reallocation effect (macro literature)

51 Reallocation effect wage productivity wage productivity L s 1 L s L s L s 1 w w 1 w w 1 Reallocation surplus L d L d Employment Employment