EMPLOYMENT FLEXIBILITY AND UK REGIONAL UNEMPLOYMENT

1. EMPLOYMENT FLEXIBILITY AND UK REGIONAL UNEMPLOYMENT Vassilis MONASTIRIOTISEuropean Institute, LSEv.monastiriotis@lse.ac.uk Labour Market Flexibility ResearchSeminar, London, 15 December 2004

2. Overview of presentation • Introductory notes • What is labour market flexibility? • theory and measurement • Literature review • institutions, unemployment, and flexibility • Research questions • unemployment, persistence, adjustment, mix • Empirical results • Conclusions

3. What is labour market flexibility? • Where? (firms, workers, unemployed, wages, other) • What? (available potential vs realised outcome) • Counter-factual (flexibility, institutions, regulations) • Content (forms, types and manifestations) • Similarly • What is a labour market? (regions?) • What do we mean by unemployment?

4. Flexibility and regulation • General definition (absence of impediments) • Non-regulatory inflexibilities and second-best rigidities • Regulation: neither sufficient nor necessary • UK labour market legislation, 1980-2000 • Perceptions about changes in flexibility… • …and lack of systematic empirical evidence

5. Chronology of UK labour laws Source: IER, DTI, B&F (1984), own

6. Types of flexibility • Economic and managerial perspectives • Various typologies • Three broad domains • Institutional – financial – individual / PF – LC – LS • Inside the firm? • The ‘flexible firm’ model and its LM-wide relevance • Four elements along two axis • Internal, External, Numerical, and Functional

8. Flexibility in the UK, 1985-2004

9. Flexibility in the UK regions 1985-1988 2001-2004

10. Elements of flexibility IF EN EF IN

11. Literature review • Three main strands of literature • UK regional unemployment (patterns & trends) Persistence – Heterogeneity – Synchronicity • Labour market flexibility in the UK Modest growth with deregulation Numerical over functional & numerical vs functional Good for SR efficiency – bad for equity & LR efficiency Composition and context matters • Labour market institutions and unemployment Rigid institutions are bad for unemployment and adjustment

12. Research questions • Four main questions • Flexibility effects on unemployment • Effects on unemployment persistence • Effects on adjustment to shocks • Compositional effects of flexibility • Questions for further research • Spatial interactions and spatial dependence • Effects on underemployment and inactivity • Effects on productivity & dynamic efficiency

13. Empirical analysis • Macroeconomic modelling • Dynamic specification • Persistence and shocks • The full model

14. Empirical analysis • General considerations • Asymmetric effects of macroeconomic shocks • The significance of regional & temporal effects (regional heterogeneity and synchronicity) • The endogeneity of flexibility (endogeneity, simultaneity, inverse causality)

16. : the impact of flexibility on unemployment

17. Conclusions • Not equated to institutions (different patterns & effects) • Not always beneficial – cannot correct for all problems of the labour market • Only conditionally can reduce unemployment • Is associated with greater adjustment to shocks • Increases unemployment persistence at the sub-national level (cross-regional equilibria?) • The mix of flexibility matters (variable & mix effects) • Warning: not a tool for economic policy!