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.

  • The consequences of trade union power erosion

    Declining union power would not be an overwhelming cause for concern if not for rising wage inequality and the loss of worker voice

    John T. Addison, May 2014
    The micro- and macroeconomic effects of the declining power of trade unions have been hotly debated by economists and policymakers. Nevertheless, the empirical evidence shows that the impact of the decline on economic aggregates and firm performance is not an overwhelming cause for concern. However, the association of declining union power with rising earnings inequality and a loss of direct communication between workers and firms is potentially more worrisome. This in turn raises the questions of how supportive contemporary unionism is of wage solidarity, and whether the depiction of the nonunion workplace as an authoritarian “bleak house” is more caricature than reality.
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  • Do institutions matter for entrepreneurial development?

    In post-Soviet countries, well-functioning institutions are needed to foster productive entrepreneurial development and growth

    Ruta Aidis, February 2017
    Supportive institutional environments help build the foundations for innovative and productive entrepreneurship. A few post-Soviet countries have benefitted from international integration through EU membership, which enabled the development of democracy and free market principles. However, many post-Soviet economies continue to face high levels of corruption, complex business regulations, weak rule of law and uncertain property rights. For them, international integration can provide the needed support to push through unpopular yet necessary stages of the reform process.
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  • Tax evasion, labor market effects, and income distribution

    Market adjustments to tax evasion alter factor and product prices, which in turn determine the true impact and beneficiaries of tax evasion

    James Alm, October 2014
    To determine the full effects of taxation on income distribution, policymakers need to consider the impacts of tax evasion. In the standard analysis of tax evasion, all the benefits are assumed to accrue to tax evaders. But tax evasion has other impacts that determine its true effects. As factors of production move from tax-compliant to tax-evading (informal) sectors, changes in relative prices and productivity reduce incentives for workers to enter the informal sector. At least some of the gains from evasion are thus shifted to the consumers of the output of tax evaders, through lower prices.
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  • Tuning unemployment insurance to the business cycle

    Unemployment insurance generosity should be greater when unemployment is high—and vice versa

    Torben M. Andersen, May 2014
    High unemployment and its social and economic consequences have lent urgency to the question of how to improve unemployment insurance in bad times without jeopardizing incentives to work or public finances in the medium term. A possible solution is a rule-based system that improves the generosity of unemployment insurance (replacement rate, benefit duration, eligibility conditions) when unemployment is high and reduces the generosity when it is low.
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  • A flexicurity labor market during recession

    Long-term unemployment did not rise under the flexicurity model during the great recession, despite the large drop in GDP

    Torben M. Andersen, July 2015
    Before the great recession of 2008–2009, the “flexicurity” model (with flexibility for firms to adjust their labor force along with income security for workers through the social safety net) attracted attention for its ability to deliver low unemployment. But how did it fare during the recession, especially in Denmark, which has been highlighted as having a well-functioning flexicurity model? Flexible hiring and firing rules are expected to lead to large adjustments in employment in a recession. Did the high rate of job turnover continue or did long-term unemployment rise? And did the social safety net become overburdened?
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  • The Danish labor market, 2000–2016

    Despite recession-induced job losses, high turnover prevented a steep increase in long-term and youth unemployment

    Torben M. Andersen, November 2017
    Denmark is often highlighted as a “flexicurity” country characterized by rather lax employment protection legislation, generous unemployment insurance, and active labor market policies. Despite a sharp and prolonged decline in employment in the wake of the Great Recession, high job turnover and wage adjustments worked to prevent long-term and thus structural unemployment from increasing. While many have been affected by unemployment, most unemployment spells have been short, which has muted the effects on long-term and youth unemployment. Recent years have seen a sequence of reforms to boost labor supply and employment, including measures targeting the young, the elderly, and immigrants.
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  • The changing of the French labor market, 2000–2017

    The French workforce is now much better educated, but unemployment, underemployment, and low-income work present challenges

    Philippe Askenazy, January 2018
    France has the second largest population in the EU. Since 2000, the French labor market has undergone substantial changes resulting from striking trends, some of which were catalyzed by the Great Recession. The most interesting of these have been the massive improvement in the education of the labor force (especially of women), the resilience of employment during the Great Recession (albeit with a very late recovery), and the dramatic emergence of very short-term employment contracts and low-income independent contractors, which together fueled earnings inequality.
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  • Latent entrepreneurship in transition economies

    Some entrepreneurs and would-be entrepreneurs face financial and bureaucratic barriers to starting a business

    Hilal Atasoy, June 2015
    Because entrepreneurial activity can stimulate job creation and long-term economic growth, promoting entrepreneurship is an important goal. However, many financial, bureaucratic, and social barriers can short-circuit the process of actually starting a business, especially in transition economies that lack established institutional systems and markets. The main obstacles are underdeveloped financial markets, perceptions of administrative complexity, political and economic instability, and lack of trust in institutions. Gender disparities in the labor market are also reflected in less entrepreneurial activity among women than men.
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  • Knowledge spillovers and future jobs

    In the future, jobs will be created by those bold enough to transform new ideas and knowledge into innovations

    David B. Audretsch, December 2015
    Globalization brings both good and bad job news. The bad news is that jobs will be outsourced from high-cost developed countries into lower-cost locations as soon as the associated economic activity becomes mechanized and predictable. The good news is that globalization creates opportunities that can be realized by people bold enough to transform new ideas and knowledge into innovations. In that way, entrepreneurs will play a vital role in creating the jobs of the future by transforming ideas and knowledge into new products and services, which will be the competitive advantage of the advanced economies.
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  • Trade and labor markets: Lessons from China’s rise

    The China Shock has challenged economists’ benign view of how trade integration affects labor markets in developed countries

    David H. Autor, February 2018
    Economists have long recognized that free trade has the potential to raise countries’ living standards. But what applies to a country as a whole need not apply to all its citizens. Workers displaced by trade cannot change jobs costlessly, and by reshaping skill demands, trade integration is likely to be permanently harmful to some workers and permanently beneficial to others. The “China Shock”—denoting China’s rapid market integration in the 1990s and its accession to the World Trade Organization in 2001—has given new, unwelcome empirical relevance to these theoretical insights.
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