Economic Policy #11 Labour Market Policy Labour Market Policy •Labor market: definitions and indicators •Efficiency of labor market •Policies –active labor market policies –regulations of labor market –labor taxation –social policy incentives EP#11: Labor Market Policy 2 Definitions Total population P Working age population (15-64): T Labour Force A Self-employed Employment: E Inactive I Employees Unemployed U less than a year more than a year full time job (permanent or temporary) part-time job (permanent or temporary) EP#11: Labor Market Policy 3 Basic indicators •Participation rate: A/T •Employment rate: E/T •Unemployment rate: U/A • •EU-27 (2016) •P = 510,3 mil. •T = 333,2 mil. (15 policies aimed at lowering labor costs •Demand constraint (e.g. due to drop in consumption) –keynesian unemployment • => stimulus policies •In the long run, supply and demand equalize –equilibrium unemployment (≠ full employment) –=> labor market policies EP#11: Labor Market Policy 8 Labor market policy (LMP) •LMP comprise policies that influence the interaction between supply and demand in order to enhance efficiency of job matching. • •How to assess labor market efficiency? –NAIRU rate –Beveridge curve EP#11: Labor Market Policy 9 The NAIRU •Lower u* => labor market policy, structural policy •Move u closer to u* => stabilization policy EP#11: Labor Market Policy 10 The NAIRU in OECD countries EP#11: Labor Market Policy 11 The Beveridge curve (BC) •Cyclical fluctuations move up and down the unemployment-vacancy combination along given BC. •Change in the efficiency of the labor market cause shift of the BC. EP#11: Labor Market Policy 12 The Beveridge curve in EU These shifts in the BC are suggestive of structural changes in the labor market. EP#11: Labor Market Policy 13 How to enhance efficiency of labor markets? •Active labor market policy (ALMP) •Regulations –Minimal wages –Regulations of dismissal •Taxation •Social policy incentives EP#11: Labor Market Policy 14 Active labor market policy •ALMP is set of measures aiming to activate various groups of unemployment. •Types of ALMP: –training –subsidized employment –public employment services –activation •ALMPs may reduce mismatch in the labor market •But these policies may lead to opposite results through displacement effect, deadweight effect or substitution effect. EP#11: Labor Market Policy 15 EP#11: Labor Market Policy 16 Minimum wages •Most countries in the world have some form of minimum wage, the scale, eligibility and operational details change from country to country. •A large body of theoretical and empirical research examines the effects of the minimum wage –In theory: no clear-cut predictions (depends on competitiveness of labor markets –Empirical results: also point in both direction – positive and negative effects of the minimum wage on employment EP#11: Labor Market Policy 17 Ratio of minimum wages EP#11: Labor Market Policy 18 Regulation of dismissal •Employment protection legislation (EPL): legal restrictions on dismissals and compensations to workers in case of early termination of employment contract •Severance regulations make it difficult for firms to reduce employment in the short run => firms are more reluctant to hire in good times •Empirical results: –EPL negatively affects unemployment inflows and outflows –coutries with stricter EPL dislay higher youth unemployment rates and lower unemployment among prime-aged groups EP#11: Labor Market Policy 19 Change in EPL index (regular contracts) EP#11: Labor Market Policy 20 Employment protection and duration of unemployment EP#11: Labor Market Policy 21 Labor and product market regulation EP#11: Labor Market Policy 22 Labor taxation •Labor is subject not only to income taxes paid by households but also to a number of social security contributions by both employees and employers. •Higher taxes raise the real cost of labor faced by firms, leading to lower employment in the sector that pays the tax. •Net effect depends on the elasticity of labor demand and supply. –In Europe: wages are set in collective bargaining => flatter labor suply curve => stronger impact on employment • EP#11: Labor Market Policy 23 Total tax wedge on a single worker (OECD, 2014) EP#11: Labor Market Policy 24 Social policy incentives •Taking up a job not only means receiving salary but also paying taxes (if the salary is high enough) and losing eligibility in income maintenance program => some people can by worse off by taking a job. •Safety net programmes may lead to a welfare trap, inducing people to remain unemployed or stay out of the labor force. •Experiences of ’work-to-welfare’ in UK and USA indicates importance of this incentive aspect. • EP#11: Labor Market Policy 25 EP#11: Labor Market Policy 26 Feasible supply-side policy: peanats or big payoffs? •The case of Netherlands: •During the 70s the Netherlands was the mother of the Dutch disease, unemployment almost reached 12 % in 1983. A generous social system was proving unsustainable at those rates of unemployment. •Wassenaar Accord in 1982: long-term agreement between social partners which moderated real wage growth, better treated part-time employment and lower labor taxation •Employment agencies provided more carrot-and-stick incentives for the unemployed to return to work. EP#11: Labor Market Policy 27 Feasible supply-side policy: peanats or big payoffs? •The case of Ireland •Anaemic growth rates, high budget deficits and unemployment reaching 18 % in the late 1980s. •R. Dornbusch: “Ireland is a sick man of Europe“. •In the late 1980s: programme of fiscal consolidation was adopted, social partners agreed on stipulating modest increase in money wages, government reduced labor taxation •In the early 90s: ALMPs were implemented, products market deregulated. EP#11: Labor Market Policy 28 Results EP#11: Labor Market Policy 29 EP#11: Labor Market Policy 30