The Consequences of Labor Market Flexibility: Panel Evidence Based on Survey Data

45 Pages Posted: 5 Sep 2003

See all articles by Robert MacCulloch

Robert MacCulloch

Imperial College London - Tanaka Business School

Rafael Di Tella

Harvard Business School - Business, Government and the International Economy Unit; National Bureau of Economic Research (NBER)

Abstract

We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-90. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce "jobless recoveries" and introduce more unemployment persistence.

Keywords: Job Security Provisions, Subjective Data, Employment, Unemployment

JEL Classification: J65

Suggested Citation

MacCulloch, Robert and Di Tella, Rafael, The Consequences of Labor Market Flexibility: Panel Evidence Based on Survey Data. European Economic Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=431140 or http://dx.doi.org/10.2139/ssrn.431140

Robert MacCulloch (Contact Author)

Imperial College London - Tanaka Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Rafael Di Tella

Harvard Business School - Business, Government and the International Economy Unit ( email )

Cambridge, MA
United States
617-495-5048 (Phone)
617-496-5985 (Fax)

HOME PAGE: http://www.people.hbs.edu/rditella/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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