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

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

1. SUMMARY

   • KEY FINDINGS (7)
     • 1. Reforms increasing level of competition in network industries --> Induce non-negligible short-term loses with employment falling below the pre-reform level.
       • 2. EPL which reduce dismissal costs --> short-term unemployment and wage loses --> But reversed within a few years.
         • 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.
   • CONCLUSIONS (4)
     • 1. Reforms yield benefits in the long run and entail losses in the short run.
       • 2. Costs are higher during downswings and statistically insignificant during upswings.
         • 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.

2. Goal: Investigate short-term effects of reforms that ease anti-competitive product market regulation and employment protection legislation.

3. 1. PRODUCT MARKET REGULATION (Goal: Lower barriers to improve efficiency and enhance competition)

   • A. DIRECT LM CONSEQUENCES
     • - In network industries: Loss in employment with max. in 3 years --> Reabsorbed afterwards.
       • - Network industries --> 2 offsetting forces: Immediate re-organisation of (large) incumbents + gradual expansion of successful entrants .
   • B. INDIRECT LM CONSEQUENCES
     • Long run benefits, not short run
       • Spill-over effects on performance of activities using these services --> Benefits in terms of their value added and export shares.
   • CONCLUSIONS: Short-term employment costs depend on characteristics of industry.

4. 2. EMPLOYMENT PROTECTION LEGISLATION - EPL (Set of rules governing the hiring and firing of workers)

   • CONCLUSIONS
     • - Extensive EPL reforms quickly modify hiring patterns by strengthening open-ended contracts (reducing dualism).
       • - Reforms might also engender temporary declines in total employment.
         • Solution --> Complementary reforms to limit adverse effects.
   • A. EVIDENCE: INDUSTRY-LEVEL + CROSS-COUNTRY DATA
     • - In short run, costly in wages and employment --> Disappears in a few years
       • - Loses larger in downturns than in upturns.
         • - 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
   • B. EVIDENCE: THREE COUNTRY STUDIES, key pillar: EPL liberalisation for regular contracts
     • Estonia (July 2009)
       • - Notice periods - Severance pay - Reinstatement in unfair dismissal
     • Spain (Feb. 2012)
       • - Dismissal legislation - Collective bargaining
     • Slovenia (April 2013)
       • - Notice periods - Severance pay - Trade unions - Redundancies - Temporary contracts

5. 3. DISINGING STRUCTURAL REFORMS THAT LIMIT SHORT-TERM COSTS (Structural reforms defined in broadest sense)

   • A. SCALING-UP ACTIVATION STRATEGIES IN TIMES OF CRISIS?
     • Address challenges through providing better incentives to various actors involved in interventions: Employers and employees.
       • Limits: How rapidly policies can be set-up when unemployment increases in downturn + Effective functioning on PES (necessary professionals and infrastructure)
   • B. RFORMING COLLECTIVE BARGAINING: SPAIN
     • Firms: Internal flexibility measures as an alternative to terminations + Simplification of firing procedures + Reduction of associated costs to employers.
       • Results: Marked reduction of separations (for temporary workers) + No impacts found on dismissal rates.
         • Complementarity between EPL + collective-bargaining reforms.
   • C. GRANDFATHER CLAUSES IN EPL REFORMS
     • Expected effects: Temporary increase in the number of new hires and unemployment levels + Delay effect of EPL
       • Findings suggest that might dampen short-term costs, but more evidence is needed.
   • D. SUSTAINING INCOME OF DISPLACED WORKER: UNITED STATES
     • 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.