Tito Boeri

Institutional Determinants of Labor Reallocation in Transition

Studying the transition means analyzing the interactions between institutions and structural change, a process we still know very little about. In this paper we show that the transition process has been very different in the countries of the Former Soviet Union (FSU) and those of Central and Eastern Europe (CEE) in terms of reallocation of labor from the old to the new sector, the extent of real wage decline and responsiveness of employment to output changes. We sift through the theoretical and empirical literature to find an explanation for these diverging adjustment trajectories and conclude that the difference can be explained in part by different policy models. The CEE countries adopted social policies that upheld wages at the bottom of the distribution and hence forced the unproductive old sector to restructure or collapse. The FSU countries allowed wages to free fall and hence did not force the hand of the old sector. Why these two models were adopted is the subject for political-economy research, however we speculate that it has to do with the relative appeal of joining the EU.

Would you like to shrink the welfare state? A survey of European citizens

Welfare state reform A survey of what Europeans want The fundamental problems facing European welfare states – high unemployment and unsustainable public pensions plans in particular – have been in the political debate for years, so why have we seen so little reform? To find out, we surveyed the opinions of citizens in France, Germany, Italy and Spain on their welfare states and on various reform options. This is what we found. First, most workers underestimate the costs of public pensions, though they are aware of their unsustainability. Second, the status quo is a majoritarian outcome: a majority of citizens opposes cuts to social security and welfare spending, but also opposes further increases. Since population ageing without reform implies an automatic expansion, our results suggest that most citizens would favour reforms that stabilize but do not shrink the current welfare states. Third, many would welcome changes in the allocation of benefits. A large number of workers in Italy and Germany would be willing to opt out of public pensions and replace them with private pensions, though the details of how this scheme is formulated matter for its popularity. And many Italians and Spaniards would welcome an extension of the coverage of unemployment insurance. Fourth, conflicts over the welfare state are mainly shaped by the economic situation of the respondent, while political ideology plays a limited role. Disagreements are found along three dimensions: young versus old, rich versus poor, and ‘outsider’ versus ‘insider’ in terms of labour market status. From a practical point of view, this suggests that there is scope to bundle reforms strategically in order to build a large and mixed coalition of supporters. — Tito Boeri, Axel Borsch‐Supan and Guido Tabellini

The effects of employment protection: Learning from variable enforcement

Employment protection legislations (EPL) are not enforced uniformly across the board. There are a number of exemptions to the coverage of these provisions: firms below a given threshold scale and workers with temporary contracts are not subject to the most restrictive provisions. This within-country variation in enforcement allows making inferences on the impact of EPL that go beyond the usual cross-country approach. In this Paper we develop a simple model that explains why these exemptions are in place to start with. Then we empirically assess the effects of EPL on dismissal probabilities, based on a double-difference approach. Our results are in line with the predictions of the theoretical model. Workers in firms exempted from EPL are more likely to be laid-off. We do not observe this effect in the case of temporary workers.(This abstract was borrowed from another version of this item.)

Employment growth, incumbents and entrants : Evidence from Germany

Abstract Longitudinal data on establishments in western Germany show that there are sort of intensive and extensive margins in the job generation process. Cyclical employment fluctuations are mainly associated with contractions and expansions of continuing plants, but the entry of establishments is the driving force of trend employment growth. As there is no evidence of significant adjustment costs for labour, it is suggested that the role of entry in employment growth has to do with differences in the product specialisation of new firms and incumbents. Product differentiation would also explain the observed high heterogeneity of establishment-level outcomes within any industry.

Enforcement of employment security regulations, on-the-job search and unemployment duration

Contrary to the popular wisdom, ‘sclerotic’ European labour markets are characterized by relatively large job turnover rates. A model is developed which – unlike standard theories of job matching with on-the-job search – can account for the coexistence of strict employment security regulations, significant job-to-job shifts and high long-term unemployment rates in these countries. This is because: i) employment security regulations can only be enforced by increasing the number of workers on ‘short-term jobs’; and ii) the latter compete for jobs with unemployed jobseekers. Evidence is presented, showing that job finding probabilities of the unemployed are decreasing in the incidence of temporary employment, in line with the predictions of the model.

Pension Reforms and the Opinions of European Citizens

This paper sheds light on the difficulties of pension reforms by analyzing the citizens´opinions on different aspects of the welfare state and its redistributive programs. We focus on the pension system, reporting the results of a questionnaire conducted in Germany and Italy in the Fall 2001. Our questionnaire was designed to shed light on the following issues: Are citizens aware of the unsustainability of the pension system and informed of its costs? Are reforms opposed by a majority or by a powerful minority? Which reform options seem politically more feasible and why? Which groups of citizens are more likely to favor reforms? We find that citizens are aware of unsustainability but lack information about the cost of the PAYG system. The status quo is a majoritarian outcome along many dimensions: most reform proposals lack a mojority and there is limited scope of packaging as reformers rarely support more than one reform option. Later retirement is the easier reform in Italy while opting-out of the PAYG system is popular in Germany, but only of accompanied by mandatory savings and with no transition burdan.

Employment Protection in Industrialized Countries: The Case for New Indicators

The poor employment performance of European countries compared with that of the U.S. is often attributed to the strictness of employment protection in Europe. Many believe that differences in labour market regulations play an important role in explaining international differences in labour market outcomes. This argument clearly has strong implications for policy design. If tight rules governing employment protection are to be blamed for poor labour market performance, then conservative governments may reduce restraints on the ability of firms to hire and fire (by weakening trade unions and labour market regulations for example). This controversial proposition has generated a considerable literature and much debate. Theoretical models show that employment protection does tend to have a constraining effect on both layoffs and hirings, job creation and destruction, unemployment inflows and outflows, with the extent to which one effect dominates the other depending on the values of the parameters. It follows that the role played by employment protection in determining aggregate labour market outcomes is mainly an empirical question. However, the available empirical evidence on the relationship between employment protection and labour market performance is based on highly imperfect measures of the strictness of employment protection legislation (EPL).1 While considerable work – both theoretical and empirical – has been done on the subject, few studies have focused on how employment protection is measured. Previous research has circumvented measurement difficulties by using qualitative rankings of EPL stringency. But recent developments – notably ongoing reforms of employment protection in most countries and the expansion of non-standard forms of employment – have not only rendered existing information obsolete, they have also called into question the methodological basis of that empirical research.

Regulation and Labour Market Performance

The increasing literature on the interactions between liberalization-integration of product markets and labour market reforms is often highly speculative and draws on a rather weak empirical basis. Cross-country indicators of regulatory frameworks are often lacking, making it difficult to identify the linkages with observed outcomes in the labour and product markets. Moreover, empirical studies have often focussed exclusively on the impact of certain labour market regulations, largely ignoring the role of product market regulations and the interactions between regulatory interventions in the two markets. As a result, while there are convincing theoretical arguments pointing to a potentially positive effect of product market liberalization on labour market performance, empirical investigations of this issue are lacking. This paper aims to provide some preliminary evidence on these issues. In particular, the cross-country patterns and changing profile of product and labour market regulations are identified. Evidence on the relationships between product and labour market regulations is discussed in the context of other policies and institutional factors affecting the labour market; and the clustering and convergence of institutions across countries are characterized. More importantly, the paper reports evidence of a potentially significant impact of product and labour market regulations on employment and its composition. The evidence presented draws heavily on a novel set of cross-country indicators of regulation in the product and labour markets assembled at the OECD. It should be stressed at the outset that these indicators are preliminary estimates and should be taken only as rough approximations of the regulatory stance across OECD countries. (The indicators are used in this paper under the exclusive responsibility of the authors and do not engage the OECD or its Member countries.)

Is Job Turnover Countercyclical

In recent years several models have been developed in an attempt to explain countercyclical movements of job turnover, the sum of gross job creation and destruction rates. However, only in the United States is a negative and statistically significant correlation between job turnover and employment growth actually observed. In the other countries studied, job turnover is either acyclical or mildly procyclical. Rather than being associated with the greater flexibility of the United States compared with the Western European labor markets, these asymmetries in the cyclical behavior of gross job flows can be attributed to statistical artifacts, namely, with the fact that U.S. job turnover statistics underrepresent the small business sector and with regression to the mean effects.

Institutional Reforms and Dualism in European Labor Markets

Most of the recent literature on the effects of labor market institutions on wages and employment draws on reforms used as natural experiments. This is a significant improvement with respect to the earlier literature which was based solely on cross-country variation in (highly imperfect) measures of these institutions. But this new literature lacks guidance from a body of theory acknowledging the fact that regulatory changes often create longlasting asymmetries, two-tier regimes, between a reformed and an unreformed segment of the labor market. This chapter provides new evidence on reforms in Europe, a continent with well established institutions and a very intense reform activity in the last 25 years. In light of this evidence, it extends a general equilibrium model of the labor market allowing for two-tier reforms of employment protection, unemployment benefits and employment conditional incentives. Next, it provides evidence on the scale and macroeconomic effects of the dualism induced by these reforms. Finally, it critically surveys the empirical literature drawing on institutional reforms in Europe.