Institutional interactions
Complementarity between pairs of
institutions.
• Labor market institutions never operate
in isolation.
• Their effects on labor outcomes interact
with those of other institutions.
• 110 potential interactions. We will focus
on the most relevant.
Why are these interactions important?
• Positive standpoint:
– take into account of all the potential interactions
of an institution with other institutional features
of the labor market.
• Normative standpoint:
– efficiency enhancing institutional reforms can find
political support only when they are engineered in
such a way as to exploit these institutional
interactions.
Flexicurity
• Lisbon strategy (2000): “need to improve the adaptability of
workers and enterprises.”
• Integrated Guidelines (2002): “Member States are asked to
promote flexibility combined with employment security (…).”
• 2006 Spring European Council: “need to develop
comprehensive policy strategies …. reforming labour market
and social policies under an integrated flexicurity approach.”
• 2007 Recommendations of the Flexicurity Group
• European Parliament deliberations with the agreement of
social partners. Support of the ETUC. Flexicurity is politically
correct.
Unemployment Benefits and Employment
Protection
• UB and EPL: protect workers against
uninsurable labor market risk.
• Three key differences:
– EPL protects only those who already have a job,
UB protects the population in working age at
large.
– EPL does not impose any tax burden on workers,
UBs are financed via a payroll tax levied on those
who have a job.
– EPL: the employer who has to offer replacement
income to the workers laid-off; UBs: are a risk
sharing device.
Unemployment Benefits and Employment
Protection
• These three key differences can be reduced by
adjustments in the design of UBs or EPL.
• However some differences between UBs and
EPL are unavoidable and they are perceived by
unemployed.
• Unemployed individuals are likely to always
rank UBs over EPL. Employees would instead
rank EPL over UBs (discount rate).
• Due to this imperfect substitutability between
UBs and EPL, we are unlikely to observe
countries with only EPL or only UBs.
Unemployment Benefits and Employment
Protection
UBs and Active Policies
• UBs can act as disincentives to job search,
ALMPs reduce moral hazard associated with
the provision of UBs.
• Positive cross-sectional correlation between
the generosity of UBs and the investment
made by individual countries in policies and
infrastructures (e.g., a public employment
service) encouraging unemployment benefit
recipients to go back to work.
UBs and Active Policies
EPL and Unions
• A stronger influence of unions in wage setting
is likely to reduce both downward wage
adjustment and wage differentials across
workers in the same firm, industry or country.
• Limiting the freedom of employers in setting
wages induces them to react to shocks by
adjusting employment levels.
• In response to the labor demand shocks that
EPL are meant to protect workers from, wages
could fall so as to make stable employment
profitable, or to induce voluntary quits.
EPL and Unions
Taxes and UBs
• Positive correlation between UBs and taxes:
– The effects of labor taxes on employment
depends on the use which is made of the tax
revenues; if perceived as a form of insurance or
deferred consumption.
– Taxes have less effects on employment when they
are progressive. Progressive taxation indeed, by
reducing labor taxes at low earning levels, reduces
the adverse effects of taxes on labor supply and
unemployment. Hence more UBs can better
coexist with high labor taxes.
Taxes and UBs
Taxes and unions
• If labor supply is rigid, taxes are paid by
workers in terms of a reduction in net wages,
labor costs for firms are unaffected: there is
no effect on employment.
• Unions impose a markup over the reservation
wage of individuals, inducing an upward shift
of the labor supply faced by employers.
Taxes and unions
• In presence of unions, labor taxes are bound
to affect not only employment, but also
unemployment as wages are set above the
reservation wage of individuals.
• If unions are internally well coordinated (
national wage setting), then the adverse
effects of taxes on employment are
"internalized" in wage setting, inducing unions
to reduce wage claims in presence of labor
taxes
Taxes and unions
• Labor taxes are compatible with low
unemployment and wage moderation in
widely different circumstances:
– when unions are weak as in the United Kingdom
since the 1980s
– in the presence of extensive consultation between
unions, government and employers.
• Labor taxes should have less adverse effects
on unemployment when coupled with
centralized collective bargaining institutions
Taxes and unions
Education and retirement programmes
• Both education and retirement programmes
operate intergenerational redistributions
albeit typically in opposite directions.
• The degree of representation of the different
generations in the political process is
therefore bound to affect the size and design
of these two institutions.
• In general, ageing societies should experience
a shift in the policy mix in favor of more
generous retirement institutions.
Education and retirement programmes
• However the two institutions could only
jointly improve the efficiency of
intergenerational transfers, making retirement
schemes and education programmes
supporting each other.
• Young people borrow from the middle age
people in order to invest in their human
capital and pay back their debt to the previous
generation in terms of social security
contributions.
Education and retirement programmes
Summarising
• Institutional interactions is a fascinating
research agenda.
• For instance, we found labor taxes to be
positively correlated not only with unions, but
also with UBs. This suggests that also unions
and UBs are positively correlated and we can
possibly find theoretical explanations for a
correlation between unions and UBs as well.