Labour market institutions and unemployment

C ES ifo D I C E R epo rt 2/ 2003 3 Forum I NT ERACTIONS BETWEEN I NSTITUTIO NS M ATTE R M ICHÈLE B ELOT* J A N C.VAN O URS ** O ne of the most striking labour market devel- opments over the past decade is the huge decline in unemployment in the Netherlands. Whereas in the ea rly 19 80s the Dutch unemplo y- ment rate was as high as 12% and in the early 1990s it wa s still as high as 8%, it fell to 2% in the early 21st century.There are several explanations for this devel opment. According to Van O urs (2003), the decline in unemployment has to do w ith wage moderation, restructuring of the social secu- rity and part- time labour. So changes in labour market institutions are responsible for the improvement in the functioning of the Dutch labour market. In other OECD countries unemployment has gone down substantially as well. As T able 1 shows, since the early 1980s also in D enmark, Ireland, the UK and the US unemployment has fallen considerably. Table 1 also shows that in Finland, France, Sweden and Switzerland unemployment has gone up substantially over the period 1983 to 2000. One of the issues in the policy debate is whether and, if so, to what extent changes in labour market institutions are responsible for these differences in the fluctuation of the unemployment rate across OECD countries.As we will discuss in more detail below, research indicates that changes in l abour market institutions can bring unempl oyment down. A further issue in the policy debate is whether countries can d esign a reform f or t hese ins titutions. Here, the answer is les s cl ear. Even in a success ful country like the Netherlands it is not clear that the policy instruments that brought the success were based on a clever design (Visser and Hemerijck 1997). Only with hindsight was there a D utch model. So,countries can learn from each other, but as Freeman (199 8) stresses, countries cannot jus t borrow some features from successful countries and expect the unemployment rate to decline since a particular institutional feature may perform dif- ferently depending on the overall institutional framework. In other words, the effect of a system of institutions is different from the sum of the effects of the individual institutions. T his is indeed what our contribution is to the literature on unemployment and labour market insti tutions (Belot a nd Van Ours 1 999; 2001). Instead of investigating the effects of institutions individually we investigated the effects of interactions between labour market institutions. Ove rview of the litera ture Over the past decades there has been a growing interest in the role of institutional labour market rigi dities , which were more prevalent in E urope than in the U S. T he labour market institutions that are usually considered in the literature are regulations that influence more or less directly the functioning of the labour market. H ence, there has been interest in taxes levied on labour, in labour standards and employment protection legisl ation, in trade unions, in wage bargaining systems , in mi nimum wa ge(s), in benefit systems, L ABOUR M ARKET I N S TI TU TI O N S AND U NEMPLOYMENT * Michèle Belot is researcher at the Netherlands Bureau of Economic Policy Analysis (CPB ),The Hague. ** Jan C. Van Ours i s Professor of Labour Economics , D epartment of E conomics,Ti lburg U niversity. Tab le 1 Changes i n unemployment rates, 198 3–2000 Group U nem ploy ment Countries 1 Rise of 4% or more Fi nland, France , Swede n, Switzerland 2 Ri s e of 0-4 % A us tria, Germ any , I taly, J apa n, Norway , New Z ea land 3 Fall of 0-4 % A us tralia, Belgium , Canada 4 Fall of 4% or more Denm ark, I reland, Nethe rland s , UK , US

Labour market institutions and unemployment

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