Academic journal article The European Journal of Comparative Economics

Labour Market Performance Differentials and Dynamics in EU-15 Countries and Regions

Academic journal article The European Journal of Comparative Economics

Labour Market Performance Differentials and Dynamics in EU-15 Countries and Regions

Article excerpt

1. Introduction

The aim of this paper is to contribute to empirical analysis of the differentials, dynamics and determinants of labour market performance across EU-15 in recent years. The topic is particularly attractive due to: (i) the existence (and, partly, persistence) of remarkable national and regional differentials (1), but also (ii) the unexpected shift from a long period of prevailing "job-less growth" and diverging employment performance to a situation of prevailing "job-rich (low-) growth" and general convergence in EU-15 labour market performance (2).

In the first part of the paper we briefly review the theoretical and empirical literature on the determinants of labour market performance and differentials (section 2), discuss labour market performance indicators (section 3.1) and place (un)employment evolutions in a more general framework of real dynamics (section 3.2).

The second part of the paper (section 4) first provides a descriptive analysis of differentials, changes and convergence trends in national/regional labour market performance indicators and in employment intensity of growth, by means of basic descriptive and non-parametric techniques. Then, with both cross-section and panel data econometric analyses, the existence of significant relationships is tested between the main regional labour market performance indicators and four groups of explicative factors: (i) development/growth indicators and sectoral structure, (ii) labour costs, (iii) institutional settings, and (iv) other variables.

2. A partial review of literature on (un)employment determinants: Okun's law, labour cost and institutional variables

As is well-known, an extremely large range of theoretical and empirical literature has analysed the determinants of labour market differentials and performance (both levels and dynamics). As it is impossible to examine all the main studies, we recall here only part of the literature, considered more strictly functional to the aims of this paper. We start from the main results based on the so-called Okun's law, highlighting its limitations which are (mainly) due to neglecting the importance of prices (labour costs and wages) and institutional factors as determinants of labour market performance.

Although the link between labour market performance and per capita GDP level has also been considered (3), the existing literature has devoted particular attention to relationships between employment/unemployment changes and GDP dynamics. Some preliminary questions are related to the definition of the (main) direction of causality: (i) is it per capita GDP growth (e.g., above a certain threshold) which increases employment (or reduces unemployment)? Or (ii) is it employment growth (or reduction in unemployment) which increases GDP? Or (iii) do both per capita GDP and (un)employment changes depend, mainly or exclusively, on many other variables, so that a simple and direct causal relationship cannot be said to exist? Theoretical discussion of the causal links between output and unemployment (or employment) has always been particularly important in the history of economic research (4). Considering the aims of this paper, we present only a brief review regarding the last three decades. Okun (1970) defined a coefficient corresponding to the rate of change of real output associated with a given change of the unemployment rate, focusing on an estimation of "potential" GDP. So, in that seminal paper, unemployment was seen as the exogenous variable and real GDP as the dependent variable. In much empirical research estimating the Okun coefficient, causality is mostly assumed to be in the opposite direction, i.e., changes in output explain variations in employment or unemployment. Prachowny (1993) considered the theoretical foundation of Okun's law and derived empirical evidence for the US, supporting the view that the Okun equation is a useful proxy in macroeconomics. …

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