The Political Economy of Labour Market Policies in Western and Eastern European Countries

Abstract

Discussions on how to organize European labour markets are one of the key public policy issues of today. In European policy debates, the most important concepts seem to be ‘flexicurity’ and the ‘transitional labour market.’ In this report we examine the cross-country variation in the generosity of unemployment benefits, which is a key element of the flexicurity model. Building on the political economy literature, we test hypotheses on the role of partisan politics, employment relations and employment protection legislation and active labour market policies in unemployment benefit reform. These factors have been extensively studied in the political economy literature, but hardly for Eastern European countries, because of a lack of data. We employ pooled time series cross-section regressions to analyze newly constructed indicators for Western and Eastern European countries. The results indicate that left-wing governments are positively related to unemployment protection for both Western and Eastern European countries, but this linkage is conditional on the economic situation. Coordinated bargaining by strong and centrally organized labour unions has also a positive impact on benefit generosity. Moreover, we find a negative relationship between the strictness of employment protection legislation and the generosity of unemployment benefit schemes, which is in line with the concept of the flexicurity model. Finally, within the EU we find a trend of convergence of unemployment benefit levels in the period 1990-2009. This finding indicates that the new EU member states have caught up.

Keywords: unemployment benefits, partisan politics, political economy, labour market, welfare state reform

JEL Classification: H53, H55, J50, J51, J58, J65, P16, P20, P26, P30, P50