Labor Market Flexibility and Institutions in European Countries
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Publication date: 2006-03-31
GNPJE 2006;206(3):23-40
Labor market inflexibility has long been seen as an important factor with a negative influence on European labor markets. The article aims to present factors determining the flexibility of labor markets in OECD countries, with a special focus on “old” EU member states. The analysis covers both a traditional approach to labor market flexibility based on the relationship between real wages and productivity and an approach covering the institutional aspect of labor market flexibility. The first part of the study examines the growth of flexibility in real wages in relation to labor productivity. The authors make use of data applying to 22 OECD countries. Because economic integration took place in stages, the comparison of wage flexibility was made for two periods, 1970-1986 and 1987-2002. In the next part of the study, with the use of a composite labor market flexibility indicator—based on Strahl’s taxonomy—the authors present the diversification of labor market flexibility in EU countries. The eventual flexibility indicator is based on the following four institutional variables: part-time employment, trade union influence, tax system and compensation. The choice of variables for the labor market flexibility indicator was largely determined by limited access to data. Definitive annual figures for the variables in question were only available for the 1998-2003 period for 16 EU countries (EU-15 plus Poland). The study reveals that there is no significant relationship between real wages and labor productivity in most countries in Europe. However, wage flexibility in relation to labor productivity varies considerably from one country to another depending on the analyzed period. This applies to not only highly developed EU countries, but also the Czech Republic, Hungary and Poland. The results of the taxonomy confirm the widespread opinion that Great Britain has the highest labor market flexibility indicator. Denmark, Finland, Belgium and Poland, on the other hand, were classified into a group of countries with the lowest flexibility. Labor market inflexibility in Denmark, Finland and Belgium is additionally confirmed by research conducted by Blanchard and Wolfers (2000) and Dicks and Papadavid (2002).
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