Labour Reallocation, Productivity John P. Martin and Stefano - - PowerPoint PPT Presentation

OECD, Directorate for Employment, Labour and Social Affairs

Setting it Right: Employment Protection, Labour Reallocation, Productivity

John P. Martin and Stefano Scarpetta

Directorate for Employment, Labour and Social Affairs OECD CPB-ROA Conference on «Flexibility of the Labour Market»

The Hague 20-21 January 2011

Focus of the Paper

• Process of labour reallocation is a crucial factor in

driving productivity growth

• Employment Protection (EP) is a potentially

important determinant of labour reallocation and productivity growth

• Literature on the impacts of EP on labour

reallocation is limited

• Paper reviews evidence on these links drawing on

recent OECD work

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EP in OECD countries

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Source: Online OECD Employment database .

0.5 1 1.5 2 2.5 3 3.5 4 2008 (scale 0-6)

Protection of permanent workers against (individual) dismissal Specific requirements for collective dismissal Regulation on temporary forms of employment

• Focus on both job creation/job destruction by firms (firm-level job

reallocation) and hires and quits (worker reallocation)

• Job creation (JC) = net employment growth at new + expanding firms;

Job destruction (JD) = jobs lost at exiting + contracting firms; Job reallocation = JC + JD Worker reallocation = hires + separations

• Data on job flows come from business registers/tax files – see

Haltiwanger et al. (2006) Data on worker flows obtained from micro-data underlying national LFSs.

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REALLOCATION OF JOBS AND WORKERS

REALLOCATION OF JOBS AND WORKERS

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Panel A. Job reallocation and excess job reallocation, 1997-2004 Panel B. Worker reallocation and excess worker reallocation, 2000-05

5 10 15 20 25 30 35 Brazil United Kingdom Mexico United States Hungary Portugal Finland Estonia Slovenia Germany Sweden

%

Job reallocation Excess job reallocation

10 20 30 40 50 60 70 Turkey Denmark United States Spain Finland United Kingdom Poland Ireland France Sweden Switzerland Norway Germany Portugal Belgium Slovak Republic Czech Republic Slovenia Hungary Italy Austria Greece

%

Worker reallocation Excess worker reallocation

Source: OECD Employment Outlook 2009.

Country averages of job and worker reallocation rates expressed in percentages and adjusted by industry composition

• Imposition of firing costs likely to hinder efficient

workforce adjustment to shocks tending to lower labour reallocation (Mortensen and Pissarides, 1994; Bentolila and Bertola, 1990)

• Reform of EP via asymmetric liberalisation of temporary

contracts leads firms to substitute temporary for permanent workers

• If EP raises costs of workforce adjustments and/or

composition of employment between temporary and regular contracts, likely to have negative impact on efficient allocation of labour/productivity growth

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THEORETICAL LINKS BETWEEN EP, LABOUR REALLOCATION AND PRODUCTIVITY

EVIDENCE ON LINKS BETWEEN LABOUR REALLOCATION AND PRODUCTIVITY GROWTH

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Source: Bartelsman, Haltiwanger and Scarpetta (2009).

5 10 15 20 25 30 35 40 45 50 Germany France Hungary United States Slovenia Netherlands Portugal Chile Korea, Rep. Estonia (in % of total productivity growth)

The effect of net entry on total labour productivity growth

• Many country case studies (US, Italy, Spain, Turkey)

provide supporting evidence

• Similar effects from cross-country panel studies, e.g. OECD

(2010) which analysed worker flows using industry-level data for 24 industries and 24 countries

• It uses a DiD approach, controlling for country and

industry effects

• Results in OECD (2010) suggest that a 1 point increase in EP

strictness for regular workers cuts worker reallocation by between 5¼ and 6¾ percentage points; similarly estimated to cut separation rates by 2¼-3 percentage points

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EVIDENCE ON LINKS BETWEEN EP AND LABOUR REALLOCATION

Regulation for individual and collective dismissals, share of temporary workers and

• verall impact on worker reallocation

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Source: OECD Employment Outlook 2010.

*** *** ** ***

• 6%
• 4%
• 2%

0% 2% 4% 6% Min Max Min Max Share of temporary workers Worker reallocation (overall effect)

Regulation for individual and collective dismissals, share of temporary workers and overall impact on worker reallocation

• Evidence from country case studies mixed on this key link
• But evidence from cross-country studies is more consistent:

strict EP has a negative impact on TFP and labour productivity

• OECD (2007), Bassanini et al. (2009) use a DiD approach to

data for 19 industries in 11-16 OECD countries over the period 1982-2003

• Results show that strict EP for regular workers has a

significant negative impact on labour productivity growth.

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EVIDENCE ON LINKS BETWEEN EP AND PRODUCTIVITY

DO WORKERS BENEFIT FROM MORE FLEXIBLE EP PROVISIONS?

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Source: OECD Employment Outlook 2010.

*** *** * *** *

• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 6% 7%

Job change Voluntary job change Involuntary job change Job-to-job transition Job-to-jobles s transition

Average wage premia to job change, 1995-2001

• Reforms to EP should be part of a comprehensive strategy

to create more and better jobs, see OECD (2006).

• Must include appropriate macroeconomic policies; steps to increase

product market competition; foster lifelong learning

• Comprehensive approach needs to secure a new “flexicurity-

type balance” which includes:

• Reasonably generous social safety net
• Backed by effective activation regime
• Several different routes to reform of EP as part of a

comprehensive reform package

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POLICY CONCLUSIONS