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External labour market flexibility: boosting productivity?

External labour market flexibility: boosting productivity?. Based on a joint research with Alfred Kleinknecht (TU Delft) Robert Vergeer Tel: +31 (0)88 86 62 995 Email: robert.vergeer@tno.nl. Varieties of capitalism (Hall & Soskice).

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External labour market flexibility: boosting productivity?

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  1. External labour market flexibility: boosting productivity? Based on a joint research with Alfred Kleinknecht (TU Delft) Robert Vergeer Tel: +31 (0)88 86 62 995 Email: robert.vergeer@tno.nl

  2. Varieties of capitalism (Hall & Soskice) 'Liberal Market Economies' (LME) - 'Coordinated Market Economies' (CME) • LME countries: • USA • Canada • Australia • Ireland • Great Britain • New Zealand • CME ('Rhineland'): • Most continental European countries • Japan

  3. Properties of LME versus CME 'Liberal Market Economies' (LME) - 'Coordinated Market Economies' (CME) • LME (Anglo-Saxon): • Easy hiring and firing • Shorter stay in same firm • Modest unemployment benefits • Weak trade unions • Labor relations are more 'conflictuous' • Wage bargaining more de-centralized: income distribution more unequal • CME (Rhineland): • Protection against firing • Longer stay in same firm • Generous unemployment benefits • Strong trade unions • Labor relations are more 'co-operative' • Wage bargaining more centralized: more income equality

  4. Does labour market flexibility promote productivity growth? Evidence from recent literature …

  5. Development of wages: Anglo-Saxon VS Continental European countries

  6. Development of the wage share, 1960s-2000s (20 OECD countries) Data: GGDC

  7. Does labour market flexibility promote productivity growth?Arguments in favour of flexible labour markets • Difficult and expensive firing of redundant personnel frustrates labour-saving process innovations • With easier firing, shifting labour from old and declining industries to innovative activities is easier • Easier firing enhances the inflow of 'fresh blood' (i.e. of people with novel ideas and networks) • The (latent) threat of easy firing reduces shirking.

  8. Does labour market flexibility promote productivity growth?Arguments against flexible labour markets • Effects on firms’ innovative activity; • Effects on workforce training; • Effects on trust and loyalty.

  9. Does labour market flexibility promote productivity growth?Arguments against flexible labour markets • Effects on workforce training Less investment in manpower training as pay-back periods become shorter; Personnel have fewer incentives to invest in firm-specific knowledge; Unions and employer-associations have less possibilities to set-up shared training facilities.

  10. Does labour market flexibility promote productivity growth?Arguments against flexible labour markets • Effects on Trust and loyalty Greater chances that trade secrets and technological knowledge will leak to competitors, larger positive externalities leading to stronger under-investment in knowledge; Easy firing of personnel will change power relations in firms. People will less easily criticize (top) management decisions. Lack of critical feedback from the shop floor can favour problematic management practices; People on the shop floor possess much of the (tacit) knowledge required for process innovations. People threatened by easy firing have incentives not to reveal knowledge relevant to labour-saving process innovations; There is more need for monitoring and control. Anglo-Saxon countries have substantially larger management bureaucracies which are frustrating for creative people (Kleinknecht et al. 2006).

  11. Does labour market flexibility promote productivity growth?Arguments against flexible labour markets Shares of managers in working population (19 OECD countries, 1984-1997)

  12. Does labour market flexibility promote productivity growth?Arguments against flexible labour markets • Effects on firms’ innovative activity A larger personnel turnover weakens the 'historical memory' of organizations and the 'learning organization'. Continuous accumulation of (tacit) knowledge for incremental innovation in a Schumpeter II 'routinized' innovation regime requires a certain rigidity in labour relations; Creative destruction becomes more effective, as firms cannot flee to laying off people or lowering wages when they are competed out by more innovative firms; Effects through (lower) wages; • Capital/labour substitution; • Induced innovation; • Vintage effect; • Creative destruction; • Demand pool/Verdoorn effects.

  13. Development of wages: Anglo-Saxon VS Continental European countries

  14. Development of hours worked: Anglo-Saxon VS Continental European countries

  15. Development of GDP: Anglo-Saxon VS Continental European countries

  16. Development of labour productivity: Anglo-Saxon VS Continental European countries

  17. Emperical strategy • Hypothesis: higher wage(share) causes higher productivity growth • Data for 20 OECD countries • 1960s – 2000s • Taken from GGDC total economy database • Approximately 800 observations

  18. Emperical strategy Take into account • Verdoorn • Unobserved country and time effects • Share of services • Lagged productivity • Employment growth

  19. Emperical strategy • Control for reversed causation -> Instruments (Arellano Bond-procedure) • Control for short term effects -> 5 year averages • Control for arbitrariness in choosing begin/end of time-span: roll-over central-year of averages (i.e. we run every regression 5 times and calculate average statistics) • # observations: approximately 110

  20. Reported P-values and significance • P_1,5,10 counts how many of the 5 rolling regressions yield a coefficient with the respective significance level; • Significance based on: average z / average p Because transformation from z to p is not linear

  21. Titel van de presentatie (Z2,p2)= (-1;0.32) (Z1,p1)= (-3;0.02)

  22. Titel van de presentatie (Z2,p2)= (-1;0.32) (Z1,p1)= (-3;0.02) Z_average = -2 -> implied p = 0.05 p_average = 0.17

  23. Titel van de presentatie (Z2,p2)= (-1;0.32) (Z1,p1)= (-3;0.02) Z_average = -2 -> implied p = 0.05 p_average = 0.17 Z_average -> overconfident p_average -> underconfident

  24. Results of Arellano-Bond regressions explaining the growth of labour productivity, on 5-year averaged values for 20 OECD countries from the 1960s to the 2000s

  25. Conclusions • A return of the wage share from the value of the 2000s (51%) to the value in the 1970s (57%) would cause a rise in productivity growth of 1.5%; • This is caused by both direct effects from higher wages as well as by indirect effects because flexible labour market undermine organisational innovative capacity.

  26. External labour market flexibility: boosting productivity? Robert Vergeer Tel: +31 (0)88 86 62 995 Email: robert.vergeer@tno.nl

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