Short-term labour market effects of structural reforms: Pain before the gain? (OECD, 2016)

SUMMARY
1. KEY FINDINGS (7)
  1. 1. Reforms increasing level of competition in network industries --> Induce non-negligible short-term loses with employment falling below the pre-reform level.
    1. 2. EPL which reduce dismissal costs --> short-term unemployment and wage loses --> But reversed within a few years.
      1. 3. Labour market reforms can be designed to attenuate costs (not eliminate).
        4. Effective activation strategies --> Reduce adverse effects of structural reforms.
        5. Individual bargaining (+ flexibility as firms adapt to individual situation) --> Limits any short-term job losses.
        6. "Grandfather clauses" --> offset short-term eployment costs of EPL reforms.
        7. Countries with low unemployment-benefits entitlements + strong fiscal positions --> Can cushion short-term effects in downturns.
        E.g. Temporarily extending benefit durations.
        E.g. Apply reforms only to new hires.
2. CONCLUSIONS (4)
  1. 1. Reforms yield benefits in the long run and entail losses in the short run.
    1. 2. Costs are higher during downswings and statistically insignificant during upswings.
      1. 3. Policy makers --> Implement reforms during downturns (greater support)
        4. Pros and cons of complementary policies to minimize costs' impact.
        Depends on: Availability of resources and infrastructures.
Goal: Investigate short-term effects of reforms that ease anti-competitive product market regulation and employment protection legislation.
1. PRODUCT MARKET REGULATION (Goal: Lower barriers to improve efficiency and enhance competition)
1. A. DIRECT LM CONSEQUENCES
  1. - In network industries: Loss in employment with max. in 3 years --> Reabsorbed afterwards.
    1. - Network industries --> 2 offsetting forces: Immediate re-organisation of (large) incumbents + gradual expansion of successful entrants .
2. B. INDIRECT LM CONSEQUENCES
  1. Long run benefits, not short run
    1. Spill-over effects on performance of activities using these services --> Benefits in terms of their value added and export shares.
3. CONCLUSIONS: Short-term employment costs depend on characteristics of industry.
2. EMPLOYMENT PROTECTION LEGISLATION - EPL (Set of rules governing the hiring and firing of workers)
1. CONCLUSIONS
  1. - Extensive EPL reforms quickly modify hiring patterns by strengthening open-ended contracts (reducing dualism).
    1. - Reforms might also engender temporary declines in total employment.
      1. Solution --> Complementary reforms to limit adverse effects.
2. A. EVIDENCE: INDUSTRY-LEVEL + CROSS-COUNTRY DATA
  1. - In short run, costly in wages and employment --> Disappears in a few years
    1. - Loses larger in downturns than in upturns.
      1. - The larger the share of temporary contracts in an economy, the higher the rate of separation and, in downturns, the greater the job destruction rate.
        - In long run, flexibility-enhancing EPL reforms affecting regulations for regular --> Reduce dualism
3. B. EVIDENCE: THREE COUNTRY STUDIES, key pillar: EPL liberalisation for regular contracts
  1. Estonia (July 2009)
    1. - Notice periods - Severance pay - Reinstatement in unfair dismissal
  2. Spain (Feb. 2012)
    1. - Dismissal legislation - Collective bargaining
  3. Slovenia (April 2013)
    1. - Notice periods - Severance pay - Trade unions - Redundancies - Temporary contracts
3. DISINGING STRUCTURAL REFORMS THAT LIMIT SHORT-TERM COSTS (Structural reforms defined in broadest sense)
1. A. SCALING-UP ACTIVATION STRATEGIES IN TIMES OF CRISIS?
  1. Address challenges through providing better incentives to various actors involved in interventions: Employers and employees.
    1. Limits: How rapidly policies can be set-up when unemployment increases in downturn + Effective functioning on PES (necessary professionals and infrastructure)
2. B. RFORMING COLLECTIVE BARGAINING: SPAIN
  1. Firms: Internal flexibility measures as an alternative to terminations + Simplification of firing procedures + Reduction of associated costs to employers.
    1. Results: Marked reduction of separations (for temporary workers) + No impacts found on dismissal rates.
      1. Complementarity between EPL + collective-bargaining reforms.
3. C. GRANDFATHER CLAUSES IN EPL REFORMS
  1. Expected effects: Temporary increase in the number of new hires and unemployment levels + Delay effect of EPL
    1. Findings suggest that might dampen short-term costs, but more evidence is needed.
4. D. SUSTAINING INCOME OF DISPLACED WORKER: UNITED STATES
  1. Overall: Extending unemployment benefit programes in bad times has, at worst, no adverse welfare effects. --> Countries with low benefit entitlements can temporarily extend benefit durations to cushion short-term effects of structural reforms.

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Short-term labour market effects of structural reforms: Pain before the gain? (OECD, 2016)

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