Tito Boeri

1
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

2
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?

3
Acceleration of labour market reforms in recent
years
Reforms increasing flexibility and rewards from
labour market participation.
Source fRDB Social Reforms Database
4
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
5
Some Convergence in EPL?
6
but not in Product Market Regulations
7
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

8
Reforms of EPL are marginal
9
while Reforms of Product Marketsare Radical
10
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

11
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?

12
Closing the Employment Gap with the US and
Japan?(employment rates)
Source European Commission
13
Progress towards Lisbon
The distance from Lisbon
80
70
60
50
40
30
20
10
0
Uk
Italy
Spain
Austria
France
Poland
Ireland
Greece
Portugal
Hungary
Sweden
Germany
Netherland
Empl rate 1995
Empl rate 2003
14
Consistent with Theory?

• Lazear neutrality. Under
• competitive product market (wMP)
• 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

15
and under rigid wages

• Two countries both with rigid wages, but EPL only
  in Rigidland ( R), not in Flexiland (F )
• Same technologies YAi log L
• Ai can be Ag (good times)gtAb (bad times)
• Probability p and (1-p) respectively
• Wages fixed at w

16
Flexiland

• L maximizes ?F Ai log L w L
• Implying wAi/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

17
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

18
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

19
Two-tier systems The Honey Moon Effect
20
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

21
Anatomy of Employment Growth
22
Anatomy of Employment Growth
23
Anatomy of Employment Growth
24
Anatomy of Employment Growth
25
From jobless growth to growthless job creation
26
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?