Economic Policy #08 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#08: Labor Market Policy 2 Definitions Total population P Working age population (15-64): T Labour Force A Inactive I Employment: E Unemployed U less than a year more than a year Self-employed Employees full time job (permanent or temporary) part-time job (permanent or temporary) EP#08: 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. (15iJip n^m'tmiiSciCiOHHm^inifiS &> i i—i r*j r^i *± lti h-- e} ^ Ci ri Lfl lQ i£ i£ ld lQ 1^- t-- t*- t*- t*- t*- t-- r-- eg cCoaoaogcOcOcOcg D0m***m*^i*;i£ SjOOOSJQQQ Q H £! 1-1 1-1 (Ji ffi O"1 71 71 0^ 0^ tf1 'J1 'J1 ff1 ff1 0^ O"1 ^ ^ 0^ ^ 5^ 0^ ff1 71 71 0^ 0^ 0^ $i $i $i v v 4 v v v O O O 0 C ^France ^—Germany ^—United Kingdom ^"United States ^Japan Unemployment rates vary a lot across countries and over time EP#08: Labor Market Policy The impact of the crisis Fig. Evolution of the unemployment rate, OECD, Q4 2007 - Q4 2017 □ Start of the crisis (Q4 2007) O Current value (Q4 2015/) ♦ Projected value (Q4 2017) ♦ ♦ *tfltit**ftftl On nfl 1 h in h n 1n h n in f i 1 1 Itl tfl m. , 11 n t»fi 11 f .............................................................................m.............................................................m....................... EP#08: Labor Market Policy 7 Active labor market policy ALMP is set of measures aiming to activate various groups of unemployment and reducing mismatch in labor market Types of ALMP: - training - subsidized employment - public employment services - activation EP#08: Labor Market Policy Table Q. Public expenditure in labour market programmes in OECD countries, 2013 and 2014 Public expenditure <%olGDP) of which: Tn tal Active Active measures not 1 G IB! programmea ffdudmg PES and programmes admin -strabon 2014 2013 2014 2013 201.: 2111.1 2( ) 14 Australia 088 094 0 24 026 008 0 09 064 0 68 Austria 2 16 220 0 75 0 80 059 062 140 1 41 Belgium 2 77 2 65 0 72 0 74 052 052 205 1 91 Canada 080 079 0 24 022 0 14 012 057 0 57 Ch*e 036 042 010 011 0 07 008 026 0 31 Czech Republic 05« 059 030 0 37 0 19 024 025 0 23 Denmark 345 333 181 1.91 1 49 1 60 165 1 42 Estonia 0 67 058 0 23 019 013 010 0 43 0 39 Finland 263 2 89 102 107 086 091 161 1 82 Franca 239 2 47 0 93 0 99 0 67 0 73 1 46 1 48 Germany 164 1 59 064 0 66 030 029 100 0 94 Greece Hungary 1.12 1.12 078 0 86 0 70 077 034 0 26 Ireland 301 086 0 71 215 MM 073 073 0 16 016 014 0.14 057 0 56 1 99 1 97 041 036 032 0 28 1 58 1 61 041 036 018 0.17 011 0.10 022 0 20 Korea 073 0 75 044 0 45 041 0 42 029 0 30 Luxembourg 1 47 1.41 062 0 65 058 060 085 0 76 Mexico 001 001 001 001 001 001 000 0 00 Netherlands 2 79 3 03 084 0 83 058 0.55 196 2 20 New Zealand 070 072 0 27 033 0 18 016 043 0 38 Norway 083 088 050 0 50 0 37 037 033 0 38 Poland 084 0 49 041 035 Portugal 215 1 89 050 0 57 046 0 53 1 65 1 32 | Slovak Republic 062 055 022 020 017 016 040 0 35 Slovenia 1.18 098 038 0 37 028 0 28 080 0 61 Spam 337 050 0 42 287 Sweden 203 1 95 1 35 1 34 1 07 1 08 068 0 62 Swazertand 1 19 1 19 056 0 57 046 046 063 0 61 Un4ed Kingdom linked Stales 036 029 0 12 0 11 009 0 08 0 24 0 18 OECD 146 134 EPftÖfe: La \9oPm arkWPol icf2 092 0 80 Latvia 054 0 53 023 0 17 0 19 0 14 031 0 38 Lithuania 046 043 0 24 024 0 19 018 022 0 19 Efficiency of ALMP • How to assess labor market efficiency? - NAIRU rate - Beveridge curve • These policies may lead to opposite results through displacement effect, deadweight effect or substitution effect. EP#08: Labor Market Policy 10 The NAIRU • Lower u* => labor market policy, structural policy • Move u closer to u* => stabilization policy EP#08: Labor Market Policy 11 The NAIRU in OECD countries 16 14 12 10 Average 1986-95 Average 1996-05 Average 2006-11 EP#08: Labor Market Policy 12 ^962 89 The Beverldge curve (BC) Job vacancies (V) U2 Number of unemployed (I/) Cyclical fluctuations move up and down the unemployment-vacancy combination along given BC. Change in the efficiency of the labor market cause shift the BC EP#08: Labor Market Policy The Beveridge curve in EU <-> > o 13 EU-28 These shifts in the BC are suggestive of structural changes in the labor market. EP#08: Labor Market Policy 14 Labor market regulations • Regulation of dismissal • Minimal wages • Taxation • Social policy incentives EP#08: Labor Market Policy 15 Minimal 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#08: Labor Market Policy 16 (b) Minimum-wage levels before taxes: percentage of median wage, pre-crisis and latest 80 SSSSSSSS^SSSSSSSSSSSSSS! 75 70 65 60 55 50 45 40 35 30 25 Jar* LavatentfanoUMme s= and it I also sho«* data lor C * Gcm-unv Mrtmjiwwaga lawal 2015 ft eipresMd In paraantaga of tna prafaäad 2015 madUn «oga. OECD Eoonomc OuOook MttN. OECD I •e based on aamlngs data tram tna Souk*: OECO Earning*\ >Vaoe et yfarnclq iTTirrj f 1if if>MB EP#08: Labor Market Policy 17 Minimum Wages Do Not Correlate With Higher Total Unemployment Total Unemployment vs. Legal Minimum Wage or Equivalent for OECD Countries Greece* Spain* R2 = 0.054 f(x) = (-0.38)*x + (11.3) • Portugal ► Slovak Republic • Mexico POT SET.*** Czech Republic Turkey _ Finland Israel Korea» Italy* Slovenia Ireland* Belgium Netherlands • • France Sweden Canada* US» . .. UK Austria* Iceland* Japan* Switzerland yew Zealand Denmark Germany Australia Luxembourg Norway* 'So $2 $4 S6 S8 $10 Minimum Wage or Wage Floor Equivalent Sl2 EP#08: Labor Market Policy 18 CS. Studies based on natural experiments • D. Card and A. Krueger: Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. American Economic Review 84(4), September 1994: 772-793 • Research question: How do employers in a low-wage labor market respond to an increase in the minimum wage? • Approach: Compare employment of teenagers in New Jersey and eastern Pennsylvania before and after the increase in the minimum wage in NJ from $4.25 to $5.05 on April 1, 1992. EP#08: Labor Market Policy 19 CS. Studies based on natural experiments (cont.) • Data: Phone survey of fast-food restaurants in NJ and eastern Pennsylvania • Results of difference-in-differences approach: Employment in Typical Fast-Food Restaurants _NJ_E Penn Before change 20.4 23.3 After change 21.0 21.2 Difference 0.6 -2.1 Difference-in-Differences = 0.6 - (-2.1) = 2.7 EP#08: Labor Market Policy 20 Regulation of dismissal • Employment protection legislation (EPL): legal restrictions on dismissals and compensations to workers in case of early termination of employment contract • The OECD uses following indicators: - Regulations under permanent contract - Strictness of collective dismissals - Regulations under temporary contracts EP#08: Labor Market Policy 21 Figure 1. Protection of permanent workers against individual and collective dismissal C varies widely Scale 0-6 3.5 t ■ Collective dismissals ■ Individual dismissals 2.5-2.0-1.5-1.0- OECD average: 2.29 Notes-. Data refer to 2013 for OECD countries and Latvia and 2012 for other countries. The height of the bar represents the value of the overall indicator on a scale of least stringent (0) to most stringent (6). Source: OECD. Employment Outlook. Paris: OECD Publishing, 2013 12); data for Israel, http://dx.doi.org/10.1787/ 888932315602. I 2 A J World of labor EP#08: Labor Market Policy 22 34 ^- Figure 2. Regulation of temporary contracts also varies widely Scale 0-6 6-1 Temporary work agency employment ■ Fixed-term contracts -o 2f._ Notes: Data refer to 2013 for OECD countries and Latvia and to 2012 for other countries. The height of the bar represents the value of the overall indicator on a scale of least stringent (0) to most stringent (6). Source-. OECD. Employment Outlook. Paris: OECD Publishing, 2013 12); data for Israel, http://dx.doi.org/10.1787/ 888932315602. I Z A J World of Labor EP#08: Labor Market Policy Change in EPL index (regular contracts) Employment protection legislation: consequences • 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 - countries with stricter EPL dislay higher youth unemployment rates and lower unemployment among prime-aged groups EP#08: Labor Market Policy 25 Employment protection and duration of unemployment c CD o Q. £ C c o -4—' (0 1— G Duration of Unemployment versus Employment Protection 25 r (months; 1995-2007 average) 20 15 10 0 y = 3.5853x + 2.3237 R2 = 0.3005 ♦ Ireland ♦ Switzerland United Kingdom ♦ United States ♦ Japan ralia ♦ Denm New Zealand Belgium ltalV ♦ Germany ^ Australia ♦ Canada** ♦ Denmark ♦ Netherlands. ■ustria Finland * Sweden ♦ Norway , Spain France 0.0 0.5 1.0 1.5 2.0 2.5 Employment Protection (index) 3.0 3.5 EP#08: Labor Market Policy 26 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 supply curve => stronger impact on employment EP#08: Labor Market Policy 27 Total tax wedge on a single worker (OECD, 2014) 0% 10% 20% 30% 40% 50% 60% Belgium Austria Germany Hungary France Italy Finland Czech Republic Sweden Slovenia Portugal Slovak Republic Spain Greece Estonia Turkey Denmark Netherlands Luxembourg Norway OECD Average Poland Iceland Japan United States Canada United Kingdom Ireland Australia 55.6% 49.4% 49.3% I I 49.0% 48.4% 48.2% ■ 43.9% 42.6% 42.5% 42.5% I 41.2% I 41.2% 40.7% 40.4% H 40.0% |38.2% I 38.1% I 37.7% 37.6% I 37.0% 36.0B6 35.6% H 33.5% I 31.9% I 31.5% I 31.5% 31.1% 28.2% 27.7% Chile ^^^H 7.C % 22.2% 21.5% 20.5% Source: OECD Taxing Wages, 2015. EP#08: Labor Market Policy 28 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#08: Labor Market Policy 29 How generous are unemployment benefits? Net household Income when out of work as percentage of net household income when in work (based on country average wage). Data is for a one-earner couple with two children in 2014. Net replacement rates for one-earner couple with two children Greco- j= Romania I I Korea >: United States ■ Poland mm Turkey O Malta '■ Australia H New Zealand ■ Slovak Republic Hungary mm Chile mm Eiton mM Sweden Hi Belgium 11 Croatia SC Czech Republic ha France I I Lithuania ■ Japan • OECO Median •» Italy 11 EU Median ■ Spain E Norway IV Latv mm Iceland H United Kingdom 83 Germany Slovenia mm Austria mm Portugal mm* Bulgaria mm Ireland I I Finland Netherlands mm Canada W Switzerland Q Luxembourg 2. Israel ZC Denmark SS Illustration: Shutterstock Source: OECD tax-benefit models EP#08: Labor Market Policy C.S. Feasible supply-side policy: lessons from history • 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. Source: Burda&Wyplosz (2012) EP#08: Labor Market Policy 31 C.S. Feasible supply-side policy: lessons from history • 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. Source: Burda&Wyplosz (2012) EP#08: Labor Market Policy 32 Source: Burda&Wyplosz (2012) EP#08: Labor Market Policy