Academic journal article The European Journal of Comparative Economics

Labour Protection and Productivity in EU Economies: 1995-2005

Academic journal article The European Journal of Comparative Economics

Labour Protection and Productivity in EU Economies: 1995-2005

Article excerpt

Abstract

The present study examines cross-national and sectoral differences in multifactor productivity growth in sixteen European countries from 1995 to 2005. The main aim is to ascertain the role of flexible employment contracts and collective labour relationships in explaining the ample differentials recorded in the European economy.

We use the EU KLEMS database for growth accounting and a broad set of indicators of labour regulations, covering two distinct 'areas' of labour regulation: employment laws and collective relations laws. This comprehensive approach allows us to consider arrangements that regulate allocation of labour inputs (fixed-term and part-time contracts, hours worked) and the payoff and decision rights of employees.

We find that, since 1995, European countries have not followed similar patterns of growth. A large number of variations between European economies are caused by marked differentials in multifactor productivity and part of this heterogeneity is caused by sectoral diversities. We show that, in labourintensive sectors such as services, fixed-term contracts, which imply shorter-term jobs and lower employment tenures, may discourage investment in skills and have detrimental effects on multifactor productivity increases. Employment protection reforms which slacken the rules of fixed-term contracts cause potential drawbacks in terms of low productivity gains. We also find that more stringent regulation of these practices, as well as a climate of collective relations, sustain long-term relationships and mitigate these negative effects.

JEL Classifications: O40, O43; O47; J50

Keywords: productivity, labour regulation, comparative institutions.

(ProQuest: ... denotes formulae omitted.)

1. Introduction3

Over the past decade, disappointing productivity growth has been recorded in the European economy and the catching-up of Europe on the U.S. has slowed significantly. Productivity differentials have mainly involved market services. Indeed, new research (van Ark et al., 2008) sheds some light on differential patterns of growth in labourintensive sectors, such as services, explaining the different performances of multifactor productivity recorded in the European economy and the US. These findings encourage further inquiry into the role of management of labour resources and their regulation with regard to successes or failures in Europe.

As known, various hypotheses on the role of labour regulation have been advocated, and their relevance has been tested in a growing number of empirical studies. Many investigations analyse the impact of these policies on employment and unemployment rates, or on unemployment inflows and outflows, but reserve less space for productivity growth. Conversely, the present paper examines the more controversial issue of the impact of labour institutions on productivity outcomes, only recently addressed by some country studies (Dew-Becker and Gordon, 2008), or industry-level cross-country research (Micco and Pages, 2006; Bassanini and Venn, 2007; Bassanini, Nunziata and Venn, 2009)4.

The expected impact of the role of labour market institutions on productivity is ambiguous and mainly related to restrictions on firing. Scarce attention is devoted to fixed-term contracts.

The deeper motives for promoting labour market flexibility are found in the theoretical literature on the potential costs of labour protection. Such protection, as argued by Hopenhayn and Rogerson (1993), perturbs the reallocation of resources from declining firms to more dynamic ones with above average productivity growth. In addition, these protective devices tend to alter the allocation of resources among sectors.

Economies with rigid labour markets manifest a distortion in their innovation activities, since they adopt mainly secondary innovations which determine a cost reduction in existing goods, but they do not experiment with primary innovations, such as those related to new products, characterised by higher returns but also higher variance (Saint Paul, 2002)5. …

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