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2005-10-06

Labour market regulation: winners and losers 

A readable and very interesting article on the effects of labour market regulation, partly based on a comparison of three French companies with three comparable British counterparts.

W. S. Siebert, Labour Market Regulation: Some Comparative Lessons [via Mahalanobis, via Steffen H.]:
Our conclusion is that labour market regulation designed to improve working conditions and wages, and strengthen collective bargaining obviously does so, but at the expense of reduced employment opportunities for outsider groups: the young, the old and the inexperienced. In particular, it drives up long-term unemployment and youth unemployment. Admittedly, we have focused on just two countries, and then on just three firms within these countries. However, the same conclusions are reached in detailed statistical studies covering OECD countries over the past 30 years. It is true that overall unemployment is not necessarily driven up by regulation, which appears to reduce outflows from jobs into unemployment about as much as it reduces outflows from unemployment into jobs. But unemployment of particular groups is driven up and concentrated. ...

Labour market regulation might arise because it is efficient (a response to market failure), or because it is politically expedient (the 'economics of politics' argument). However, as regards the efficiency view, we have seen that labour regulation is double-edged: the employed gain at the expense of the unemployed. This result does not seem very efficient.

It is easier, then, to explain labour regulation in political terms. The median voter determines how labour market regulation is to be used as an instrument of redistribution. ... the median voter is not unemployed. Moreover, the median voter is likely to be drawn from the majority semi-skilled group. This group is substitutable for the (predominantly unskilled) unemployed, and thus gains when labour regulation prices unskilled workers out of the market. Skilled worker groups and capital lose - though capital is more mobile than labour and can eventually avoid the burden. The fact that left-wing governments that normally represent semi-skilled workers promote labour regulation is in line with the political view. So also is the link between labour regulation and trade union power, since trade unions are strongest among semi-skilled groups.

The political theory can also offer an explanation for why labour regulation changes. For example, when labour demand becomes more elastic, the pay-off from regulation should fall. Globalisation, by making capital become more mobile, and countries more open, will have increased labour demand elasticity, and this could explain the slight tendency towards deregulation ...


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