Labor markets and institutions

Institutions have important consequences for the performance of households, companies, governments, and entire markets—they determine the welfare of nations. Contributions to this subject area explore the underlying mechanisms and the politico-economic determinants of such structures. Many provide background analyses that offer evidence on how new institutions and policies would affect labor markets.

  • How responsive is the labor market to tax policy?

    When applied to the most responsive segments of the labor market, tax policy can increase lifetime earnings and employment

    Richard Blundell, May 2014
    With aging populations and increased demands on government revenue, countries need to boost employment and earnings. Tax policy should focus on labor market entry and retirement. Those are the points where labor supply is most responsive to tax incentives, which can enhance the flow into work of people leaving school and women with young children and can prolong employment among older workers. Human capital policy has a complementary role in improving the payoff to work and ensuring that earnings hold up longer over a lifetime.
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  • Do labor costs affect companies’ demand for labor?

    The effect of overtime, payroll taxes, and labor policies and costs on companies’ product output and countries’ GDP

    Higher labor costs (higher wage rates and employee benefits) make workers better off, but they can reduce companies’ profits, the number of jobs, and the hours each person works. Overtime pay, hiring subsidies, the minimum wage, and payroll taxes are just a few of the policies that affect labor costs. Policies that increase labor costs can substantially affect both employment and hours, in individual companies as well as the overall economy.
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  • Employment effects of minimum wages

    When minimum wages are introduced or raised, are there fewer jobs? Global evidence says yes

    David Neumark, May 2014
    The potential benefits of higher minimum wages come from the higher wages for affected workers, some of whom are in poor or low-income families. The potential downside is that a higher minimum wage may discourage employers from using the low-wage, low-skill workers that minimum wages are intended to help. If minimum wages reduce employment of low-skill workers, then minimum wages are not a “free lunch” with which to help poor and low-income families, but instead pose a tradeoff of benefits for some versus costs for others. Research findings are not unanimous, but evidence from many countries suggests that minimum wages reduce the jobs available to low-skill workers.
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  • Gender quotas on boards of directors

    Little evidence that gender quotas for women on boards of directors improve firm performance

    Nina Smith, May 2014
    Arguments for increasing gender diversity on boards of directors range from ensuring equal opportunity to improving firm performance, but the empirical results are mixed and often negative. Current research does not justify gender quotas on grounds of economic efficiency. Furthermore, in most countries the number of women qualified to join boards of directors is limited, and it is not clear from the evidence that quotas lead to a larger pool of qualified female candidates in the medium and long term.
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  • Entrepreneurs and their impact on jobs and economic growth

    Productive entrepreneurs can invigorate the economy by creating jobs and new technologies, and increasing productivity.

    Entrepreneurs are a rare species. Even in innovation-driven economies, only 1–2% of the work force starts a business in any given year. Yet entrepreneurs, particularly innovative entrepreneurs, are vital to the competitiveness of the economy. The gains of entrepreneurship are only realized, however, if the business environment is receptive to innovation. In addition, policymakers need to prepare for the potential job losses that can occur in the medium term through “creative destruction” as entrepreneurs strive for increased productivity.
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  • Short-time work compensations and employment

    Temporary government schemes can have a positive economic effect

    Pierre Cahuc, May 2014
    Government schemes that compensate workers for the loss of income while they are on short hours (known as short-time work compensation schemes) make it easier for employers to temporarily reduce hours worked so that labor is better matched to output requirements. Because the employers do not lay off these staff, the schemes help to maintain permanent employment levels during recessions. However, they can create inefficiency in the labor market, and might limit labor market access for freelancers and those looking to work part-time.
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  • Employment protection

    Policymakers need to find the right balance between protecting workers and promoting efficient resource allocation and productivity growth

    Stefano Scarpetta, May 2014
    Laws on hiring and firing are intended to protect workers from unfair behavior by employers, to counter imperfections in financial markets that limit workers’ ability to insure themselves against job loss, and to preserve firm-specific human capital. But by imposing costs on firms’ adaptation to changes in demand and technology, employment protection legislation may reduce not only job destruction but also job creation, hindering the efficient allocation of labor and productivity growth.
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  • Unemployment benefits and unemployment

    The challenge of unemployment benefits is to protect workers while minimizing undesirable side effects

    Robert Moffitt, May 2014
    All developed economies have unemployment benefit programs to protect workers against major income losses during spells of unemployment. By enabling unemployed workers to meet basic consumption needs, the programs protect workers from having to sell their assets or accept jobs below their qualifications. The programs also help stabilize the economy during recessions. If benefits are too generous, however, the programs can lengthen unemployment and raise the unemployment rate. The policy challenge is to protect workers while minimizing undesirable side effects.
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  • Equal pay legislation and the gender wage gap

    Despite major efforts at equal pay legislation, gender pay inequality still exists in the developed economies. How can this be put right?

    Despite equal pay legislation dating back 50 years, American women still earn 22% less than their male counterparts. In the UK, with its Equal Pay Act of 1970, and France, which legislated in 1972, the gap is 21% and 17% respectively, and in Australia it remains around 17%. Interestingly, the gender pay gap is relatively small for the young but increases as men and women grow older. Similarly, it is large when comparing married men and women, but smaller for singles. Just what can explain these wage patterns? And what can governments do to speed up wage convergence to close the gender pay gap? Clearly, the gender pay gap continues to be an important policy issue.
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  • The internet as a labor market matchmaker

    How effective are online methods of worker recruitment and job search?

    Peter J. Kuhn, May 2014
    Since the internet’s earliest days, firms and workers have used various online methods to advertise and find jobs. Until recently there has been little evidence that any internet-based tool has had a measurable effect on job search or recruitment outcomes. However, recent studies, and the growing use of social networking as a business tool, suggest workers and firms are at last developing ways to use the internet as an effective matchmaking tool. In addition, job boards are also emerging as important for the statistical study of labor markets, yielding useful data for firms, workers, and policymakers.
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