Capital Markets, Corporate Governance, and Labour Market Flexibility

1. Capital Markets, Corporate Governance, and Labour Market Flexibility Boyd Black (Queen’s, Belfast), Howard Gospel (King’s, London), and Andrew Pendleton (Manchester Metropolitan University) Labour Market Flexibility ResearchSeminar, London, 15 December 2004

2. The main question • Why are some national labour markets more flexible than others? Do equity markets and corporate governance explain variations in labour market flexibility (LMF)? • OR are institutions, product markets, culture more important? • Background • Policy interest in labour flexibility (OECD etc) • Belief that product markets a primary influence on LMF in the industrial relations literature

3. The impact of equity markets and corporate governance 2 main arguments • Equity market pressures force managers to attain LMF. A financial constraints argument. See Hutton, Porter etc. M & A break implicit contracts • Well-developed equity markets support growth and new sectors, facilitating labour adjustment and more flexible labour deployment. An opportunities argument

4. Dimensions of labour market flexibility 2 sets of dimensions: Micro vs macro Pay flexibility vs employment flexibility Micro/pay: contingent pay etc Micro/employment: job tenure, PT employment, temporary employment, functional flexibility Macro/pay: relative pay structures, real wage flexibility Macro/employment: activity rates, hours worked, cyclical adjustment, structural unemployment

5. Predictions • Equity market pressures lead to • Shorter job tenure • Higher contingent employment • Lower functional flexibility • Higher activity rates • Higher hours worked • Contingent pay systems • Higher pay dispersion • Greater real wage flexibility

6. Other potential influences • Product markets • Competition (Nickell 1996) • Regulation (Nicoletti et al 2001). OECD • Institutions • Employment protection • Social welfare protections (HM Treasury) • Industrial relations institutions • Culture • Individualism vs collectivism

7. Labour market flexibility • dependent variables – labour market flexibility – various dimensions • cross-section data mid to late 1990s • national data drawn from variety of sources • for summary statistics see Tables 1 and 2

8. Equity markets and corporate governance • equity markets variable (level of stock trading as % of market capitalisation + new issues as % of market capitalisation) weighted by number of listed firms per million population – see Table 3 • corporate governance variable level of M&A activity number of deals to population

9. Product markets • product market competition imports/GDP • product market regulation • see Table 4

10. Institutions • government institutions – see Table 5 replacement rate benefit duration active labour market programmes employment protection legislation tax wedge • labour institutions union density union coverage coordination (union and employer) • two indices constructed using weights from Blanchard and Wolfers (2000) – Table 6

11. hypothesis • our labour market flexibility variables will be a function of our financial and governance indicators, product market indicators, government and labour/IR institutional indicators, and Hofstede’s IDV index LMFi = ai + bi equitymarket + ci corporategovernance + di prodmarket + ei prodregulation + fi governinstitutions + gi labourinstitutions + hiIDV +iiunemploy

12. Estimation • for each dependent variable • OLS regression • using TSP package • variables with t<1 dropped

13. Results • micro-level employment flexibility: mixed support for our equity/corporate governance hypothesis: equity markets associated with job tenure but not with part-time or temporary working • macro-level employment: equity markets positively associated with activity rates and negatively with structural unemployment, but not with employment over the cycle • pay flexibility: equity markets associated with the use of equity plans for workers and with pay dispersion, but not with real wage flexibility • product market regulation and competition, institutions and national culture all play a role

14. Concluding remarks • strong links between equity markets and pay flexibility with policy implications for European governments • equity markets associated with increased activity rates and reduced structural unemployment • equity markets also associated with shorter job tenure • product market: regulation associated with longer tenure and reduced real wage flexibility; import competition with reduced unemployment • government involvement in employment and social protection linked to greater real wage flexibility as well as to more temporary working • IR institutions associated with structural unemployment and wage flexibility – policy implication weak unions and bargaining or bargaining coordination • national culture important and needs to be taken into account in framing other policies