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Is the Honeymoon Over? Partial Labour Market Reforms nd the Growth of Low Productivity Jobs in Europe

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?

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Is the Honeymoon Over? Partial Labour Market Reforms nd the Growth of Low Productivity Jobs in Europe

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  1. 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

  2. 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?

  3. Acceleration of labour market reforms in recent years * Reforms increasing flexibility and rewards from labour market participation. Source: fRDB Social Reforms Database

  4. Average Number of Reforms 1985 - 1990 1991 - 1996 1997 - 2002 In 7 product markets 1.21 3.32 1.40 - Deceleration of product market reforms in recent years * Reforms increasing competition in airline, TLC, electricity, gas, postal service, road and railways flexibility. Source: fRDB Social Reforms Database

  5. Some Convergence in EPL?

  6. …but not in Product Market Regulations

  7. 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

  8. Reforms of EPL are marginal

  9. while Reforms of Product Marketsare Radical

  10. 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

  11. 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?

  12. Closing the Employment Gap with the US and Japan?(employment rates) Source: European Commission

  13. Progress towards Lisbon The distance from Lisbon 80 70 60 50 40 30 20 10 0 Uk Italy Spain Austria Ireland France Poland Greece Hungary Portugal Sweden Germany Netherland* Empl rate 1995 Empl rate 2003

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. Employment in Good Times Temporary Permanent Employment in Bad Times PRE REFORM TRANSITION POST REFORM Two-tier systems: The Honey Moon Effect

  20. Two-tier systems • Flexibility only at the margin • Under good times a “buffer stock” is built-up. Hiring of Temps • Average productivity declines (under DRS) • More turnover, accommodated by TEMPs

  21. Anatomy of Employment Growth

  22. Anatomy of Employment Growth

  23. Anatomy of Employment Growth

  24. Anatomy of Employment Growth

  25. From jobless growth to growthless job creation

  26. 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?

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