Labour Market Institutions and Demographic Employment Patterns

Abstract

Using data from 17 OECD countries over the 1960-96 period and a simple theoretical framework, we investigate the impact of institutions on the relative employment of youth, women, and older individuals. Empirically, the employment prospects of these groups are especially affected by poorly performing labour markets. Theoretically, we show that labour market institutions meant to improve workers' income share imply larger disemployment effects when labour supply is more elastic. Hence, demographic groups other than prime-age males (who have little to do out of employment) should be relatively less employed in more unionized and/or regulated labour markets. We regress relative employment and unemployment outcomes on a standard set of labour market institutions, aggregate unemployment, and period and country effects. This design allows us to control for unmeasured country-specific factors that affect relative employment and unemployment. We find that the effects of wage-setting structures, labour taxes, employment protection, retirement-related institutions and unemployment insurance schemes are broadly consistent with theoretical predictions. In particular, for both men and women, more extensive involvement of unions in wage-setting significantly decreases the employment rate of young and older individuals relative to the prime-aged, with no significant effects on the relative unemployment of these groups. In contrast, a larger role for unions has insignificant effects on male-female employment differentials, but does raise female unemployment relative to male unemployment. This pattern of results suggests that union wage-setting policies price the young and elderly out of employment and drive disemployed individuals in these groups to non-labour-force (education, retirement) states. The situation for women is more complex. A possible scenario is that high union wages encourage female labour force participation, but that women who would otherwise be disemployed by high wage floors are able to find work in unregulated sectors or are absorbed by public employment.

Keywords: Wage compression, unions

JEL Classification: E20, J10, J20