Labor Market Policy: A Comparative View on the Costs and Benefits of Labor Market Flexibility

36 Pages Posted: 2 Aug 2010

See all articles by Lawrence M. Kahn

Lawrence M. Kahn

Cornell University - School of Industrial and Labor Relations; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); IZA Institute of Labor Economics

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Abstract

I review theories and evidence on wage-setting institutions and labor market policies in an international comparative context. These include collective bargaining, minimum wages, employment protection laws, unemployment insurance (UI), mandated parental leave, and active labor market policies (ALMPs). Since it is unlikely that an unregulated private sector would provide the income insurance these institutions do, these policies may enhance economic efficiency. However, to the extent that unemployment or resource misallocation results from such measures, these efficiency gains may be offset. Overall, Scandinavia and Central Europe follow distinctively more interventionist policies than the English speaking countries in the Northern Hemisphere. Possible explanations for such differences include vulnerability to external market forces and ethnic homogeneity. I then review evidence on the impacts of these policies and institutions. While the interventionist model appears to cause lower levels of wage inequality and high levels of job security to incumbent workers, it also in some cases leads to the relegation of new entrants (disproportionately women, youth and immigrants) as well as the less skilled to temporary jobs or unemployment. Making labor markets more flexible could bring these groups into the regular labor market to a greater extent, at the expense of higher levels of economic insecurity for incumbents and higher levels of wage inequality. The Danish model of loosening employment protections while providing relatively generous UI benefits with strict job search requirements holds out the possibility of reducing barriers for new entrants and the less skilled while maintaining some level of income insurance.

Keywords: labor market flexibility

JEL Classification: J68

Suggested Citation

Kahn, Lawrence M., Labor Market Policy: A Comparative View on the Costs and Benefits of Labor Market Flexibility. IZA Discussion Paper No. 5100. Available at SSRN: https://ssrn.com/abstract=1651745

Lawrence M. Kahn (Contact Author)

Cornell University - School of Industrial and Labor Relations ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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IZA Institute of Labor Economics

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