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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?

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slide1

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
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?
acceleration of labour market reforms in recent years
Acceleration of labour market reforms in recent years

* Reforms increasing flexibility and rewards from labour market participation.

Source: fRDB Social Reforms Database

deceleration of product market reforms in recent years

Average Number of Reforms

1985

-

1990

1991

-

1996

1997

-

2002

In 7 product markets

1.21

3.32

1.40

-

Deceleration of product market reforms in recent years

* Reforms increasing competition in airline, TLC, electricity, gas, postal service, road and railways flexibility.

Source: fRDB Social Reforms Database

why is it so difficult to reform product markets
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
summarising
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
outline1
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?
slide13

Progress towards Lisbon

The distance from Lisbon

80

70

60

50

40

30

20

10

0

Uk

Italy

Spain

Austria

Ireland

France

Poland

Greece

Hungary

Portugal

Sweden

Germany

Netherland*

Empl rate 1995

Empl rate 2003

consistent with theory
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

and under rigid wages
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
flexiland
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 LF = =(pAg+(1-p)Ab))/w

rigidland
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 LR =(pAg+(1-p)Ab))/w =LF

slide18
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
two tier systems the honey moon effect

Employment in Good Times

Temporary

Permanent

Employment in Bad Times

PRE REFORM

TRANSITION

POST REFORM

Two-tier systems: The Honey Moon Effect
two tier systems
Two-tier systems
  • Flexibility only at the margin
  • Under good times a “buffer stock” is built-up. Hiring of Temps
  • Average productivity declines (under DRS)
  • More turnover, accommodated by TEMPs
final remarks
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?