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?
• Two-tier reforms. Do they pay in terms of employment? For how long?
2

Acceleration of labour market reforms in recent years
Average Number of Reforms per Year and Country
1985-1990 1991-1996 1997-2002
Employment Protection Legislation 0.05 0.14 0.31
Non-Employment Benefits 0.09 0.33 0.82
* Reforms increasing flexibility and rewards from labour market participation.
Source: fRDB Social Reforms Database
3

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

Some Convergence in EPL?
5

…but not in Product Market
Regulations
6

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
7

Reforms of EPL are marginal
8

while Reforms of Product Markets are Radical
Airlines Marginal
Radical
Telecom Marginal
Radical
Electricity Marginal
Gas
Radical
Marginal
Radical
Post Marginal
Radical
Railways Marginal
Radical
Road Marginal
Radical
Total per column
Average per year
1
0
1
6
3
0
0
11
1985-1990
0
Increasing Competition
1991-1996
5
1997-1998
13
3
4
0
1
9
45
4
4
0
9
8
3
3
8
1
5
3
0
5
0
2
0
0
2
0
0
0
1
4
34
5.07
1
93
16.03
1
39
19.05
0
0
0
1
0
0
0
0
Decreasing competition
1985-1990
0
1991-1996
0
1997-1998
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
1
1
0
0
0
0
0
0
1
0.02
0
0
0
0
3
1.05
6
0
5
12
6
9
3
14
Total per row
18
Of which decreasing (%)
100
12
58
12
9
100
100
100
88.89
100
88.89
66.67
92.86
100
-
100
100
6
170
12.14
100
97.65
9

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
10

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?
11

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

80
70
60
50
40
30
20
10
0
Progress towards Lisbon
The distance from Lisbon
Empl rate 1995 Empl rate 2003
13

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
14

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
15

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 L F = =(pAg+(1-p)Ab))/w
16

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 L R =(pAg+(1-p)Ab))/w =L F
17

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
18

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

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

Anatomy of Employment Growth
Italy 1995-2003
80
70
60
50
40
30
20
10
0
1995
OECD data.
1996 1997 1998 permanent employees self-employed workers
1999 2000 2001 2002 temporary employees unpaid family workers
2003
21

Anatomy of Employment Growth
Ireland 1995-2003
80
70
60
50
40
30
20
10
0
1995
OECD data.
1996 1997 1998 permanent employees self-employed workers
1999 2000 2001 2002 temporary employees unpaid family workers
2003
22

Anatomy of Employment Growth
Spain 1995-2003
80
70
60
50
40
30
20
10
0
1995
OECD data.
1996 1997 1998 permanent employees self-employed workers
1999 2000 2001 2002 temporary employees unpaid family workers
2003
23

Anatomy of Employment Growth
Portugal 1995-2003
80
70
60
50
40
30
20
10
0
1995
OECD data.
1996 1997 1998 permanent employees self-employed workers
1999 2000 2001 2002 temporary employees unpaid family workers
2003
24

From jobless growth to growthless job creation
25

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?
26