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Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions

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Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions DELSA/ELSA/WD/SEM(2006)4 Employment Patterns in OECD Countries: Reassessing the Role of Policies and Institutions Andrea Bassanini and Romain Duval 35 OECD SOCIAL, EMPLOYMENT AND MIGRATION WORKING PAPERS Unclassified DELSA/ELSA/WD/SEM(2006)4 Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development 09-Jun-2006 ___________________________________________________________________________________________ English - Or. English DIRECTORATE FOR EMPLOYMENT, LABOUR AND SOCIAL AFFAIRS EMPLOYMENT, LABOUR AND SOCIAL AFFAIRS COMMITTEE Un D ELSA/EL cl assi fi ed SA /WD/SE M(2006)4 SOCIAL, EMPLOYMENT AND MIGRATION WORKING PAPERS NO. 35 EMPLOYMENT PATTERNS IN OECD COUNTRIES: REASSESSING THE ROLE OF POLICIES AND INSTITUTIONS By Andrea Bassanini and Romain Duval This paper is also issued as an OECD Economics Department Working Paper No. 486. JEL: J38, J58, J68 All Social, Employment and Migration Working Papers are now available through OECD's Internet website at http://www.oecd.org/els En g lis h - O JT03210336 r . Eng l Document complet disponible sur OLIS dans son format d'origine ish Complete document available on OLIS in its original format DELSA/ELSA/WD/SEM(2006)4 DIRECTORATE FOR EMPLOYMENT, LABOUR AND SOCIAL AFFAIRS http://www.oecd.org/els OECD SOCIAL, EMPLOYMENT AND MIGRATION WORKING PAPERS http://www.oecd.org/els/workingpapers This series is designed to make available to a wider readership selected labour market, social policy and migration studies prepared for use within the OECD. Authorship is usually collective, but principal writers are named. The papers are generally available only in their original language – English or French – with a summary in the other. Comment on the series is welcome, and should be sent to the Directorate for Employment, Labour and Social Affairs, 2, rue André-Pascal, 75775 PARIS CEDEX 16, France. The opinions expressed and arguments employed here are the responsibility of the author(s) and do not necessarily reflect those of the OECD Applications for permission to reproduce or translate all or part of this material should be made to: Head of Publications Service OECD 2, rue André-Pascal 75775 Paris, CEDEX 16 France Copyright OECD 2006 2 DELSA/ELSA/WD/SEM(2006)4 ACKNOWLEDGEMENTS Andrea Bassanini and Romain Duval are economists at the Directorate for Employment, Labour and Social Affairs and the OECD Economics Department, respectively. Catherine Chapuis-Grabiner, Sébastien Martin and Rebecca Oyomopito provided excellent research assistance. Comments from Sveinbjorn Blöndal, Jean-Philippe Cotis, Martine Durand, Jorgen Elmeskov, Mike Feiner, David Howell, John P. Martin, Giuseppe Nicoletti, Paul Swaim, Raymond Torres and participants to the joint WP1/WP5 EPC- ELSAC meeting in Paris, January 2005, are also gratefully acknowledged. Any errors are the responsibilities of the authors alone. The views expressed in this paper are those of the authors, and do not necessarily reflect those of the OECD or of its member countries. 3 DELSA/ELSA/WD/SEM(2006)4 SUMMARY This paper explores the impact of policies and institutions on employment and unemployment of OECD countries in the past decades. Reduced-form unemployment equations, consistent with standard wage setting/price- setting models, are estimated using cross-country/time-series data from 21 OECD countries over the period 1982- 2003. In the “average” OECD country, high and long-lasting unemployment benefits, high tax wedges and stringent anti-competitive product market regulation are found to increase aggregate unemployment. By contrast, highly centralised and/or coordinated wage bargaining systems are estimated to reduce unemployment. These findings are robust across specifications, datasets and econometric methods. As policies and institutions affect employment not only via their impact on aggregate unemployment but also through their effects on labour market participation - particularly for those groups “at the margin” of the labour market, group-specific employment rate equations are also estimated. In the “average” OECD country, high unemployment benefits and high tax wedges are found to be associated with lower employment prospects for all groups studied, namely prime-age males, females, older workers and youths. There is also evidence that group-specific policy determinants matter, such as targeted fiscal incentives. The paper also finds significant evidence of interactions across policies and institutions, as well as between institutions and macroeconomic conditions. Consistent with theory, structural reforms appear to have mutually reinforcing effects: the impact of a given policy reform is greater the more employment-friendly the overall policy and institutional framework. Certain more specific interactions across policies and institutions are found to be particularly robust, notably between unemployment benefits and public spending on active labour market programmes as well as between statutory minimum wages and the tax wedge. Finally, it is shown that macroeconomic conditions also matter for unemployment patterns, with their impact being shaped by policies. 4 DELSA/ELSA/WD/SEM(2006)4 RÉSUMÉ Cet article explore l’impact des politiques et des institutions sur l’emploi et le chômage dans les pays de l’OCDE au cours des dernières décennies. Des équations réduites de taux de chômage, telles que dérivées par exemple d’un modèle de négociations salariales, sont estimées sur un panel de 21 pays de l’OCDE sur la période 1982-2003. Il ressort que, dans le pays « moyen » de l'OCDE, le taux moyen de remplacement des indemnités chômage, le coin fiscalo-social et le degré de réglementation des marchés de produits augmentent le taux de chômage structurel. A contrario, il apparaît qu’un haut degré de centralisation/co-ordination des négociations salariales réduit le chômage structurel. Ces résultats sont robustes à des changements de spécification, d’échantillon et de méthode d’estimation économétrique. Étant donné que les politiques et les institutions affectent l’emploi non seulement via leur impact sur le chômage mais aussi au travers de leurs effets sur la participation au marché du travail –en particulier pour les groupes « à la marge » du marché du travail, des équations d’emploi par groupes sont également estimées. Il ressort que dans le pays « moyen » de l’OCDE, le taux de remplacement des indemnités chômage et le coin fiscalo-social réduisent les perspectives d’emplois de chacun des groupes étudiés, à savoir les hommes de 25 à 55 ans, les femmes, les travailleurs âgés et les jeunes. Certains déterminants spécifiques à chaque groupe jouent également un rôle, en particulier les incitations fiscales ciblées. Le document conclut également à l’existence d’interactions significatives entre politiques et institutions, de même qu’entre institutions et chocs. En accord avec la théorie, il ressort également que les effets des réformes structurelles se renforcent mutuellement : l’impact d’une réforme donnée est d’autant plus fort que l’ensemble des autres politiques et institutions sont déjà favorables à l’emploi. Certaines interactions plus spécifiques entre politiques apparaissent particulièrement robustes, notamment entre le taux de remplacement des indemnités chômage et les dépenses en politiques actives en faveur de l’emploi, ou encore entre le salaire minimum et le coin fiscalo-social. Enfin, l’article montre que les conditions macro-économiques affectent le chômage et que cet impact dépend des politiques. 5 DELSA/ELSA/WD/SEM(2006)4 TABLE OF CONTENTS ACKNOWLEDGEMENTS ............................................................................................................................3 ABSTRACT ....................................................................................................................................................4 RÉSUMÉ.........................................................................................................................................................5 EMPLOYMENT PATTERNS IN OECD COUNTRIES: REASSESSING THE ROLE OF POLICIES AND INSTITUTIONS Summary and main findings....................................................................................8 1. THE DETERMINANTS OF STRUCTURAL UNEMPLOYMENT.................................................11 Introduction................................................................................................................................................11 1.1. Panel data econometric analysis of the role of policies and institutions.........................................11 1.2. Policy interactions...........................................................................................................................18 1.3. Additional determinants of unemployment patterns: housing policy, minimum wages and active labour market policies .....................................................................................................................27 1.4. Interactions between institutions and shocks ..................................................................................32 2. THE DETERMINANTS OF EMPLOYMENT RATES....................................................................40 Introduction................................................................................................................................................40 2.1 Prime-age males..............................................................................................................................40 2.2 Prime-age
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