Labour market flexibility, productivity and employment by U3CRs1

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									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)
'Liberal Market Economies' (LME) - 'Coordinated Market Economies' (CME)

    LME countries:                     CME ('Rhineland'):

    •   USA                            • Most continental
                                         European countries
    •   Canada
                                       • Japan
    •   Australia
    •   Ireland
    •   Great Britain
    •   New Zealand
  Properties of LME versus CME
'Liberal Market Economies' (LME) - 'Coordinated Market Economies' (CME)

    LME (Anglo-Saxon):                 CME (Rhineland):

    •Easy hiring and firing            • Protection against firing
    •Shorter stay in same firm         • Longer stay in same firm
    •Modest unemployment benefits      • Generous unemployment
                                         benefits
    •Weak trade unions
                                       • Strong trade unions
    •Labor relations are more          • Labor relations are more 'co-
    'conflictuous'                       operative'
    •Wage bargaining more de-          • Wage bargaining more
    centralized: income distribution     centralized: more income
    more unequal                         equality
        Does labour market flexibility promote productivity
                            growth?
                      Evidence from recent literature …
Study                                  Effect (EPL +1 -> prod …)
Nickell and Layard (1999)              +0.09
Buchele and Christiansen (1999)        +0.45
Scarpetta and Tressel (2004)           NS; negative only if combined with
                                       intermediate level of coordination for
                                       wage bargaining

Storm and Naastepad (2007)             +0.2
Autor, Kerr and Kugler (2007)          Positive
OECD (2007)                            -0.02
Dew-Becker and Gorden (2007)           +1.2 (∆ EPL)
Lucidi and Kleinknecht (2009)          Positive
Development of wages: Anglo-Saxon VS
Continental European countries
  400
            Real wage (1960=100)


  300




  200




  100
        1960     1965      1970      1975       1980      1985      1990      1995      2000 2004

                                   Cont.-European                     Anglo-Saxon

         Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
         Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
         Netherlands, Portugal, Spain, Sweden;
         Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
Development of the wage share, 1960s-
2000s (20 OECD countries)
                                   Wage share


        60%


        58%


        56%


        54%


        52%


        50%


        48%


        46%
              1963   1968   1973   1978   1983   1988   1993   1998   2003


Data: GGDC
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.
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.
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.
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).
 Does labour market flexibility promote productivity growth?
        Arguments against flexible labour markets
Shares of managers in working population (19 OECD countries, 1984-1997)
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.
Development of wages: Anglo-Saxon VS
Continental European countries
  400
            Real wage (1960=100)


  300




  200




  100
        1960     1965      1970      1975       1980      1985      1990      1995      2000 2004

                                   Cont.-European                     Anglo-Saxon

         Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
         Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
         Netherlands, Portugal, Spain, Sweden;
         Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
Development of hours worked: Anglo-Saxon VS
Continental European countries
  200
            Total hours worked (1960=100)

  180


  160


  140


  120


  100
        1960     1965      1970      1975      1980       1985      1990      1995      2000 2004

                                   Cont.-European                     Anglo-Saxon

         Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
         Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
         Netherlands, Portugal, Spain, Sweden;
         Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
Development of GDP: Anglo-Saxon VS
Continental European countries
  400
            Real GDP (1960=100)



  300




  200




  100
        1960     1965      1970      1975      1980       1985      1990      1995      2000 2004

                                   Cont.-European                     Anglo-Saxon

         Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
         Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
         Netherlands, Portugal, Spain, Sweden;
         Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
Development of labour productivity: Anglo-Saxon
VS Continental European countries
  400

            labour productivity (1960=100)

  300




  200




  100
        1960     1965      1970      1975       1980      1985      1990      1995      2000 2004

                                   Cont.-European                     Anglo-Saxon

         Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;
         Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,
         Netherlands, Portugal, Spain, Sweden;
         Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
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
Emperical strategy


Take into account
 Verdoorn
 Unobserved country and time effects
 Share of services
 Lagged productivity
 Employment growth
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
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
                        22
                        10-4-2012
                        Titel van de presentatie




            (Z2,p2)=
            (-1;0.32)


(Z1,p1)=
(-3;0.02)
                                   23
                                   10-4-2012
                                   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
                                   24
                                   10-4-2012
                                   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
                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
Independents                     (I)               (II)               (III)              (IV)                   (V)                   (VI)
ˆ
w                                 0.46
                                       **/**
                                                     0. 35
                                                          */**
                                                                        0.44
                                                                              **/**
                                                                                            0. 45
                                                                                                 **/**
                                                                                                                  0.41
                                                                                                                         **/**
                                                                                                                                         0. 41
                                                                                                                                              /**

                P_1,5,10      1,4,5              1,2,4              1,4,5               2,3,4                 0,3,5                  1,2,3
                                      ***/***             **/**             ***/***              ***/***               ***/***                **/**
ws                                0.24               0. 17              0.23                0. 23                 0.22                   0. 21
                P_1,5,10      4,5,5              2,3,4              2,5,5               4,5,5                 4,5,5                  3,4,5
Catchup                          -0.05
                                       */**
                                                    -0. 06
                                                          ***/***
                                                                       -0.06
                                                                              **/**
                                                                                           -0. 07
                                                                                                 */**
                                                                                                                 -0.05
                                                                                                                         */**
                                                                                                                                        -0. 06
                                                                                                                                              **/***

                P_1,5,10      1,2,3              4,5,5              1,3,4               2,2,3                 1,3,4                  2.4.4
           ˆ
Verdoorn ( Y )                    0.16
                                       /
                                                     0. 08
                                                          /
                                                                                            0. 09
                                                                                                 /
                                                                                                                  0.21
                                                                                                                         /

                P_1,5,10      0,0,0              0,0,0                                  0,0,0                 0,0,0
ˆ
         (a)                                             /
     1                                             -0. 11
                                                    (1. 37)
                P_1,5,10                         0,1,1
lˆ                                                                                                                                      -0. 94
                                                                                                                                              /

                P_1,5,10                                                                                                             0,0,0
                                                                                                 /
Services                                                                                   -0. 03
                P_1,5,10                                                                0,0,0
                                                                                                                         /**
Germany                                                                                                          -0.02
                P_1,5,10                                                                                      2,3,3
Sargan                     P =0.48 ; Pz =0.45 P =0.55 ; Pz =0.51 P =0.47 ; Pz =0.45 P =0.68 ; Pz =0.68     P =0.55 ; Pz =0.54    P =0.54 ; Pz =0.53
                P_1,5,10      0,0,0              0,0,1              0,0,0               0,0,0                 0,0,0                  0,0,0
Hansen                     P =0.45 ; Pz =0.45 P =0.82 ; Pz =0.83 P =0.46 ; Pz =0.46 P =0.54 ; Pz =0.54     P =0.42 ; Pz =0.42    Pz =0.59 ; Pz =0.61
                P_1,5,10      0,0,0              0,0,0              0,0,0               0,0,0                 0,0,0                  0,0,0
Ar2                        P =0.48 ; Pz =0.46 P =0.60 ; Pz =0.42 P =0.32 ; Pz =0.28 P =0.46 ; Pz =0.42 P =0.43 ; Pz =0.41        P =0.39 ; Pz =0.36
                P_1,5,10      0,0,0              0,0,0              0,0,1               0,0,0                 0,0,0                  0,0,0
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.
External labour market flexibility: boosting
productivity?




Robert Vergeer
Tel: +31 (0)88 86 62 995
Email: robert.vergeer@tno.nl

								
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