Dual track reforms and the honeymoon of European unemployment

Transcription

1 Dual track reforms and the honeymoon of European unemployment Tito Boeri (Università Bocconi) Nuremberg, October

2 The words of the veteran JeanClaude Juncker (Mr. Euro): Politicians know what they should do, but they do not know how to be reelected after they do the things that they know they should do Is it true?

3 Lisbon strategy: need to improve the adaptability of workers and enterprises. Integrated Guidelines (IG 21): Member States are asked to promote flexibility combined with employment security and reduce labour market segmentation, having due regard to the role of the social partners Spring European Council: need to develop more systematically in the National Reform Programmes comprehensive policy strategies to improve the adaptability of workers and enterprises. reforming labour market and social policies under an integrated flexicurity approach, adequately adapted to specific institutional environments and taking into account the need to combat labour market segmentation.

4 Do they know how to do it?

5 Outline Taking stock of reforms in labor/product markets Why more labor than product market reforms? A political feasibility theorem Twotier reforms. How do they operate? Do they generate support for radical reforms? The example of employment protection

6 The frdb Social Policy Reforms Database Period: Countries: EU15 (except Luxembourg) 5 reforms areas: 1) Employment Protection Legislation (EPL) 2) NonEmployment Benefits (NEB) 3) Public Pension Systems (PEN) 4) Working Time (TIME) 5) Immigration Policy (IMM) Focus on qualitative features of reforms

7 Direction and Scope Reforms are classified along two main dimensions: 1. Direction: Do they reduce or increase the generosity of pension and NEB systems? Improve working time flexibility? Make EPL and migration policy more or less stringent? 2. Scope: marginal or radical reforms (qualitative assessment of the norm; is it encompassing?)

8 Popular and Unpopular Reforms Reforms are popular if: increase employment protection increase the generosity of the pension system increase restrictions to immigration reduce rewards from participation into the labour market (through an increase in nonemployment benefits or loser activation schemes) The opposite holds for unpopular reforms

9 Counting reforms ( ) 61% Total per column 50% radical 46% marginal IMM 0% radical 84% marginal TIME 93% radical 61% marginal PEN 100% radical 78% marginal NEB 71% radical 42% marginal EPL Of which unpopu lsr (%) Total per row Popular Unpopular

10 Reforms and Macroeconomic Conditions Politically difficult reforms are more likely under bad macroeconomic conditions than under strong growth Reforms and Growth Percentag Negative (g<0) Stagnant (0 g<1) Slow (1 g<2) Strong (g>2) Growth rate Politically difficult reforms Radical reforms

11 Reforms and Government Ideology Comparative advantages? Reforms of immigration are done by the left, employment protection by the right Reforms and Government Ideology Percentage of difficult reforms Percentage EPL NEB PEN IMM Total Reforms Area Leftwing coalition Rightwing coalition

12 The timing of reforms Unpopular reforms at the beginning of the legislature popular at the end of it 80 Reforms and Parliamentary terms Percentage of popular reforms 60 Percentage EPL NEB PEN IMM Total Reforms Area First years of parliamentary term Last year of parliamentary term

13 Reforms and Government fragmentation Surprisingly, cohesive coalitions seem to implement more popular reforms than fragmented governments 80 Reforms and Government fragmentation Percentage of popular reforms 60 Percentage EPL NEB PEN IMM Total Reforms Area High cohesion Medium Very fragmented

14 Acceleration of labor market, deceleration of product market reforms EPL NEB PRODUCT MARKET Source: frdb Social Reforms Database Boeri and Monti (2007)

15 Why is it more difficult to reform product markets? Reforms leaving aside incumbents as in labour markets are not feasible Dual track possible only across sectors (some sectors liberalized while others are not), but when liberalizing a few sectors, benefits of reforms are not perceived (as they are spread across many consumers), while losses are concentrated Progress was made only by delegating authority (blame?) to Brussels (Single Market)

16 Reforms of EPL confined to temporary contracts (except Spain) 5 Index of regulation of regular employment 6 Index of regulation of temporary employment 4 Portugal Turkey United States Netherlands Sweden Germany France Turkey Spain Greece Japan Austria Korea Poland Mexico Norway Finland Hungary New Belgium Italy Australia Ireland Zealand Denmark Canada United Kingdom Late 1990s Mexico France Spain Portugal Norway Germany Finland Korea Sweden New Zealand Austria Denmark Hungary Poland Japan Netherlands Australia Ireland United Kingdom Canada United States Greece Belgium Italy

17 while reforms of product markets are radical Increasing Competition Decreasing competition Total per row Of which decreasing (%) Airlines Marginal Radical Telecom Marginal Radical Electricity Marginal Radical Gas Marginal Radical Post Marginal Radical Railways Marginal Radical Road Marginal Radical Total per column Average per year

18 Summarizing Acceleration of labor market reforms, not of product market reforms Reform activity in labor markets driven almost entirely by marginal reforms (e.g., temporary contracts) Role of political obstacles. Reforms at the margin are often the only ones which are politically feasible

19 Outline Taking stock of reforms in labor/product markets Why more labor than product market reforms? Twotier reforms. How do they operate? Do they generate support for radical reforms? The example of employment protection

20 The sea change 1994 OECD Jobs Study: The labour market has become particularly worrying in Europe slow employment growth has always been a feature of the Efta and EC regions there are indications that employment has been unusually weak visàvis output growth In the EC employment growth has been generally sluggish.

21 Since then Employment to population rates and the distance from Lisbon (NorthAmerica) DK SE AUT UK NL DE PT FI FR LU BE GR IE IT ES Source: Eurostat

22 From jobless growth to growthless job creation? % yearly change in employment rate Spain Netherlands Finland Italy Greece Belgium Portugal United Kingdom France Luxembourg Denmark Sweden Austria Germany Ireland % yearly empl_year change in real GDP Y1 apparent elasticity in the US

23 Why growthless job creation? Two potential explanations: 1. Productivity: Reforms reducing unemployment benefits and minimum wages made more lowskilled workers marketable. It implies increased employment of low skilled workers 2. Flexibility: Employers exploit flexibility at the margin, hiring workers under temporary contracts. It implies increased employment of temporary workers.

24 Contribution to employment growth of unskilled labour and temporary employment % of total employment growth Belgium Spain Italy Netherlands Portugal countries Workers with primary and low education Temporary workers

25 The role of temporary contracts in job creation Contributo delle diverse forme contrattuali alla crescita occupazionale (variazione degli stock) Full time permanent Full time temporary Part time Autonomi

26 Consistent with Theory? Lazear neutrality. With flexible wages and riskneutral agents (interested only in average wages over the period) EPL consisting of pure severance has no effects on employment and wages With rigid wages, EPL reduces profits (tax on capital) and reduces turnover/fluctuations, but does not affect steady state employment

27 Twotier systems Need to investigate transitional dynamics of flexibility at the margin Under good times a buffer stock is builtup. Hiring of Temporary workers. Under bad times temps are laidoff Average productivity declines (under DRS) More turnover, accommodated by TEMPs

28 The mechanism: a Honey Moon Effect Boeri and Garibaldi (2007) Under good times a buffer stock is builtup. Hiring of Temps. Under bad times temps are laid off. Average employment increases unlike standard models of EPL. Employment in Good Times Temporary Permanent Employment in Bad Times PRE REFORM TRANSITION POST REFORM

29 Optimal levels of permanent and temps in the transition phase

30 Intuition With EPL no adjustment of labor to shocks. Employers choose the employment level maximising expected profits and stick to it Without EPL same employment, but more profits each period With a twotier regime, efficient adjustment only during upturns. More profits than with EPL, less than without it

31 Key Implications of twotier regimes More mobility (less inaction) Increasing share of temps. A temporary positive effect on average employment. A temporary negative effect on average productivity.

32

33 Some micro evidence 1 Boeri and Garibaldi, 2007

34 Some micro evidence 2 Boeri and Garibaldi, 2007

35 Differenceindifferences Boeri and Jimeno, 2006

36 Thus Honeymoon effect contributes to explaining growthless job creation..... and the increase in the share of temporary contracts.. as transitory phenomena.

37 Does the honeymoon create political support for radical reforms? Who wins and who loses Concentration of labor market risk on the temps Temps in between employment and unemployment: low wages at high insecurity Are temps (young people) represented? Are they aware?

38 Relative risk of unemployment Concentrazione del rischio di diventare disoccupato in un anno Tempo indeterminato Tempo determinato Cococo Autonomi Under 30 Over 50 Fonte: ISTAT, Indagini sulle forze di lavoro

39 Two wage distributions

40 Fixedterm contracts are for young workers Probability of moving to permanent contract about.10 in Italy Part de contrats précaires, parmi tous les contrats Taux de CDD France Danemark PaysBas Italie Espagne Portugal Age Panel Européen

41 Perceived Job insecurity. Concentrated among young people

42 Temporary employment in Spain (as % of total employees) Seasonal Probatory Fixedterm All

43 Timing of the radical reform in Spain Regular longterm employees / active population

44 Final remarks Twotier reforms as a politically viable strategy to reform labor markets They temporarily increase the employment content of growth, but create longstanding asymmetries between temps and openended contracts. Equity and efficiency concerns (Blanchard and Landier, Cahuc and Postel Vinay) Segmentation can be reduced by building up consensus for more radical reforms.. if policymakers know how to do it