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Unemployment and Labor Market Rigidities

Theory, Empirical Evidence and Recent Labor Market Reforms in Germany

©2004 Diplomarbeit 78 Seiten

Zusammenfassung

Inhaltsangabe:Abstract:
Many European countries have experienced a significant increase of unemployment in recent years. Especially striking is the fact that unemployment rates in most European countries are significantly higher as compared to the United States.
This paper reviews several theoretical models, which have been proposed to explain this phenomenon. Predominantly, these models claim a link between the poor performance of European labor markets and the high level of market regulation. Commonly referred to as the Eurosclerosis debate, prominent approaches consider insider-outsider relationships, search-models, and the influence of hiring and firing costs on equilibrium employment.
The paper presents empirical evidence of each model and studies the relevance of the identified rigidities as a determining factor for high unemployment in Europe. Furthermore, a case study analyzes the unemployment problem in Germany and critically discusses recent reform efforts.
Einleitung:
In vielen europäischen Ländern ist die Arbeitslosigkeit in den vergangenen Jahren stark angestiegen. Besonders auffallend ist hierbei, das die Arbeitslosenrate in den meisten europäischen Staaten über den Werten in den USA liegt.
Die vorliegende Arbeit untersucht eine Reihe theoretischer Modelle, die in der Literatur zur Erklärung dieses Phänomens diskutiert werden. Hauptsächlich sehen diese Modelle eine Verbindung zwischen dem hohen Grad an Marktregulierung und der schlechten Performance europäischer Arbeitsmärkte. Im Rahmen der so genannten Eurosclerosis-Debatte beleuchten mehrere Ansätze eine Insider-Outsider-Problematik, Such-Modelle, sowie den Einfluss von Einstellungs- und Kündigungsschutzregelungen (hiring- and firing-costs) auf die gleichgewichtige Beschäftigungsquote.
Die Arbeit diskutiert die empirische Relevanz jedes Modells und analysiert insbesondere ihre Bedeutung als Erklärungsansatz für die hohe Arbeitslosigkeit in Europa. Darüber hinaus untersucht eine Fallstudie das Arbeitslosigkeitsproblem in Deutschland und diskutiert jüngste Reformmaßnahmen des so genannten Hartz-Programms. Insbesondere steht dabei die Frage im Vordergrund, ob einzelne Arbeitsmarktinstrumente wie Ich-AGs, Persönliche Service Agenturen (PSAs) sowie Mini- und Midijobs Abhilfe schaffen zu den in der Literatur identifizierten Beschäftigungshemmnissen.

Inhaltsverzeichnis:Table of Contents:
1.Introduction1
2.Labor Market Rigidities and the European Unemployment […]

Leseprobe

Inhaltsverzeichnis


ID 8465
Drechsler, Denis: Unemployment and Labor Market Rigidities -
Theory, Empirical Evidence and Recent Labor Market Reforms in Germany
Hamburg: Diplomica GmbH, 2004
Zugl.: Universität Potsdam, Diplomarbeit, 2004
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Autorenprofil
Dipl. pol. Denis M. Drechsler, M.A.
Kontakt:
107, rue d'avron
75020 Paris
Tel. 0033 (1) 45 24 9601
E-Mail:
d.drechsler@gmx.de
Pers. Daten:
Geb.: 21. März 1976 in Bremen
Familienstand: ledig
Denis Drechsler studierte Politikwissenschaften und Volkswirtschaftslehre an der Universität
Potsdam, dem Institut d'Etudes Politiques de Grenoble, sowie der University of Wisconsin in
Milwaukee. Die jeweiligen Studiengänge schloss er mit einem Diplom bzw. Master im April 2003
und Mai 2004 ab. Sein besonderes Interesse gilt der institutionellen Wirtschaftstheorie sowie
speziell der Arbeitsmarktpolitik. Die vorliegende Arbeit über Arbeitslosigkeit und Arbeitsmarktri-
giditäten bildet den Abschluss seines VWL-Diplomstudiums an der Universität Potsdam.
Herr Drechsler hat neben seinem Studium an einer französischen und amerikanischen Hoch-
schule auch durch längere Praktika und Arbeitsaufenthalte viel Zeit im Ausland verbracht. Zwi-
schen 1999 und 2000 arbeitete er als Forschungsassistent für die Weltbank in Washington, DC.
An gleicher Stelle war er 2002 als Research Fellow am American Institut for Contemporary Ger-
man Studies (AICGS) an der Johns Hopkins University tätig. Während seines Masterstudiums in
Wisconsin arbeitete er an der dortigen Universität und unterrichtete als Teaching Assistant die
Einführungskurse in die Mikroökonomik. Seit September 2004 ist er Consultant für die
Institutions, Governance, and Partnership Division am OECD Development Centre in Paris.
Weitere Beschäftigungen umfassen eine dreijährige Tätigkeit als studentische Hilfskraft für das
Europäische Institut für Internationale Wirtschaftsbeziehungen an der Universität Potsdam, die
freie Mitarbeit für eine Radiostation an der Universität in Grenoble, sowie ein Praktikum im
Abgeordnetenbüro von Hubert Ulrich im Deutschen Bundestag in Berlin.

- ii -
Abstract
Many European countries have experienced a significant increase of
unemployment in recent years. This paper reviews several theoretical models,
which have been proposed to explain this phenomenon. Predominantly, these
models claim a link between the poor performance of European labor markets and
the high level of market regulation. Commonly referred to as the Eurosclerosis
debate, prominent approaches consider insider-outsider relationships, search-
models, and the influence of hiring and firing costs on equilibrium employment.
The paper presents empirical evidence of each model and studies the relevance of
the identified rigidities as a determining factor for high unemployment in Europe.
Furthermore, a case study analyzes the unemployment problem in Germany and
critically discusses recent reform efforts.

- iii -
Table of Contents
1. Introduction...1
2.
Labor Market Rigidities and the
European
Unemployment
Problem...4
3.
Theories of High Unemployment in Europe...11
3.1 Demand
for
Labor...11
3.1.1 Hiring and Firing Costs...11
3.1.2 Demand Shocks and Labor Demand ...13
3.1.3 Labor Demand and International Outsourcing...16
3.2 Supply of Labor ...16
3.2.1 Search Models...17
3.2.2 Search Effort and Unemployment Compensation...18
3.2.3 Optimal Adjustment of Unemployment Compensation...23
3.3 Rigidities and Wage Bargaining ...27
3.4 Why do rigidities exist? ...28
3.4.1 Job Security and Insider Power...29
3.4.2 Insider Power and the Level of Unionization ...31
4. Empirical
Evidence...34
5.
Unemployment in Germany...39
5.1 Overview of Germany's Unemployment Problem ...40
5.2 Recent Reform Efforts - The Hartz Program...43
5.2.1 Job Procurement and Personal Service Agencies ...44
5.2.2 Low-Wage Sector and Mini- and Midijobs...47
5.2.3 Long-Term Unemployment and Entrepreneurial Spirit...49
5.2.4 Incentives and Disincentives...53
5.3 Discussion of the Hartz Reforms ...56
5.3.1 Sticks and Carrots...57
5.3.2 Long-Term Unemployment ...58
5.3.3 Job Creation ...58
5.3.4 Hartz Reforms ­ Vision and Reality ...59
6. Conclusion ...61
References...65

- iv -
List of Figures
Fig. 1:
Unemployment Rates in European vs. Total OECD Countries...1
Fig. 2:
Employment Rates in the European Union, Japan, and the U.S.A...2
Fig. 3:
Unemployment Rates in Member States of the European Union...3
Fig. 4:
Unemployment Rates in Europe and the United States...3
Fig. 5:
GDP Growth and Employment in the European Union ...8
Fig. 6:
GDP Growth in OECD-Europe and the U.S.A...9
Fig. 7:
Employment Growth in Europe and the U.S.A. ...9
Fig. 8:
Employment Growth and Consumer Confidence...14
Fig. 9:
Replacement Rates and Benefit Duration in OECD Countries ...21
Fig. 10: Re-Integration Into the Labor Market...22
Fig. 11: Change in Gross Replacement Rates ...27
Fig. 12: Productivity Growth and Wage Increase in the European Union...36
Fig. 13: Employment Protection in Selected OECD Countries ...38
Fig. 14: Unemployment in Germany...41
Fig. 15: Employed People Relative to One Retiree ...43
Fig. 16: Regular and Temporary Employment in Germany...46
Fig. 17: Ich-AGs Since Their Introduction in January 2003 ...51
Fig. 18: Short- and Long-Term Unemployment in Germany ...52
Fig. 19: Average Duration of Unemployment Spell in Germany ...53
Fig. 20: Long Term as Percentage of Total Unemployment in Germany...53
List of Tables
Tab. 1: Wage Flexibility ...7
Tab. 2: Long-Term Unemployment in OECD Countries ...23
Tab. 3: Mean Job Tenure ...25
Tab. 4: Rigidity Measures of OECD Economies...31
Tab. 5: Unskilled Workers and the German Unemployment Problem ...47
Tab. 6: Labor Market Indicators Two Years After The Hartz Report ...60
Tab. 7: Percentage of People in Jobs for Less Than One Year...64
Tab. 8: Percentage of People in Jobs for More Than Ten Years ...64
Tab. 9: Percentage of People in Jobs for More Than 20 Years...64

- v -
List of Abbreviations
General
avg. -
Average
comp. - Compare
et al.
-
And others
etc. -
Et
cetera
f. -
Following
page
ff. -
Following
pages
Fig. -
Figure
i.e. -
For
example
Mio. -
Million
p.a. -
Per
annum
Tab. -
Table
vs. -
Versus
W. -
West
Organizations, Fixed Expressions
ABM -
Arbeitsbeschaffungsmaßnahme
(publicly subsidized work
program)
AL 2
-
Arbeitslosengeld 2 (new unemployment aid in Germany)
BVG -
Berliner
Verkehrsbetriebe
(Berlin Public Transportation
Company)
DIW
-
Deutsches Institut für Wirtschaftsforschung, Berlin
EU -
European
Union
EU-15
-
European Union, including members before 2004
enlargement
EU-19
-
EU-15 plus the Czech Republic, Hungary, Poland, and
Slovakia
FED
-
Federal Reserve System, U.S. Central Bank
GDP
-
Gross Domestic Product
GLS
-
Generalized Least Squares
GNP
-
Gross National Product
MRPL
-
Marginal Revenue Product of Labor
OECD
-
Organization for Economic Cooperation and Development

- vi -
PSA
-
Personal Service Agency
SAM -
Strukturanpassungsmaßnahme
(publicly subsidized work
program)
Countries
A -
Austria IRL -
Ireland
AUS -
Australia
J
-
Japan
B -
Belgium L -
Luxembourg
CA -
Canada
N
-
Norway
D -
Germany NL -
Netherlands
DK -
Denmark NZ -
New
Zealand
E -
Spain
P -
Portugal
F -
France S -
Sweden
FIN -
Finland
SZ
-
Switzerland
GDR
-
German
Democratic
Republic
U.K. -
United
Kingdom
GR -
Greece
I -
Italy
U.S./U.S.A. -
United States of
America
Mathematical Symbols
-
Probability
of
dying
-
Discount
factor
-
Probability of losing a job
µ
-
Probability of accumulating (µ
e
) or losing (µ
u
) skills
-
Probability of receiving new job offer
-
Tax
rate
-
Sum
F
-
Distribution of available job offers
h -
Skill
level
t -
Time
variable
V
-
Value Function (V
b
when entitled to benefits, V
0
otherwise)
w -
Wage
variable

Unemployment and Labor Market Rigidities
- 1 -
1.
Introduction
Unemployment has risen considerably in member countries of the Organization
for Economic Cooperation and Development (OECD). Especially striking is the
fact that roughly since the late 1970s unemployment in European OECD countries
has consistently been higher compared to the rest of the developed world. During
the past 20 years, this gap has constantly remained at around 2 percentage points.
The disparity between European and non-European unemployment rates is
even more astonishing as the composition of European OECD countries has
changed over time; i.e., despite the fact that the Czech Republic, Hungary, Poland,
and Slovakia became members in the 1990s, the basic pattern nevertheless stayed
intact. Apparently, some common factors prevent European labor markets from
functioning efficiently. The poorer labor market performance of European
countries
2
is illustrated in both higher unemployment rates
3
and the lower level of
employment (comp. Fig. 1 and Fig. 2).
Fig. 1: Unemployment Rates* in European vs. Total OECD Countries
0
2
4
6
8
10
1960
1965
1970
1975
1980
1985
1990
1995
2000
OECD-Europe
Total OECD
Source: Own illustration. Data: 1961-1977: OECD Labour Force Statistics; 1978-1994: OECD
Employment Outlook (1995); 1995-2003: OECD Employment Outlook (2004).
2
For reasons of data availability, empirical material will sometimes refer to European countries,
member countries of the European Union, and OECD-Europe respectively.
3
If not indicated differently, unemployment rates will be measured as percentage of labor force.

Theory, Empirical Evidence and Recent Labor Market Reforms in Germany
- 2 -
Fig. 2: Employment Rates* in the European Union, Japan, and the U.S.A.
(1975-2003)
* percent of working age population.
Source: European Commission (2003: 16).
Even though it is difficult to regard the European labor market as a single entity
(comp. Fig. 3, which depicts different unemployment rates of EU member
countries), many studies have nevertheless tried to establish a universal
explanation for the significant increase of European unemployment.
4
Commonly
referred to as the Eurosclerosis problem (a term introduced by Giersch, 1985),
researchers have above all focused on the high degree of public regulation, which
especially distinguishes the European from the American labor market.
Such reasoning is particularly appealing as the widening gap between
unemployment in Europe and the United States seems to support this approach
(comp. Fig. 4). According to the Eurosclerosis literature, high unemployment
rates in European countries can be attributed to labor market rigidities that prevent
market clearance. Unlike the United States, European economies are assumed to
be less capable of absorbing large economic shocks or even small changes in
consumer preferences while maintaining high employment.
This paper gives an overview of the existing literature on the persistently
high unemployment in Europe. Starting from a general theory of labor market
equilibrium, factors are derived that distort the demand and supply of labor and
potentially deteriorate market outcomes. Having identified these rigidities,
4
Heckman (2002: 5) even believes that there is high consensus within the economic profession
"on the basic forces underlying the high persistent unemployment [...] in Europe." These can
be traced down to disincentives caused by labor market rigidities.

Unemployment and Labor Market Rigidities
- 3 -
respective theories are presented that have been proposed in the literature; these
include insider-outsider relationships, hiring and firing costs, and search models.
This part will also offer a discussion of why labor market rigidities exist and what
forces determine whether or not they persist. A subsequent chapter looks into
some empirical evidence in support of the discussed approaches and evaluates the
explanatory power of each model. Finally, a case study considers the
unemployment problem in Germany and discusses recent labor market reforms.
Fig. 3: Unemployment Rates in Member States of the European Union
Source: European Commission (2000: 19).
Fig. 4: Unemployment Rates in Europe and the United States (1978-2003)
0
2
4
6
8
10
2003
1998
1993
1988
1983
1978
EU-15
United States
Source: Own illustration. Data: OECD Labour Market Statistics (2004).

Theory, Empirical Evidence and Recent Labor Market Reforms in Germany
- 4 -
2.
Labor Market Rigidities and the
European Unemployment Problem
A labor market brings into equilibrium the demand and supply of labor. Just like
any other market for ordinary goods and services the adjustment mechanism
involves finding an equilibrium price, that is, a wage, which is simultaneously
acceptable for both the demander and supplier of labor. The efficiency of a labor
market can thus be measured by first considering whether or not it does in fact
clear the market; another efficiency aspect considers the time it takes to reach
market equilibrium. High unemployment rates (especially long-term structural or
institutional unemployment) and, to a lesser extent, long adjustment times (i.e.,
short-term frictional or cyclical unemployment) are consequently an indicator of
poor labor market performance.
From a neoclassical perspective, unemployment in a sufficiently
competitive labor market will not exist, because changes in labor demand and
supply are immediately reflected in the equilibrium wage level. As Greenwald and
Stiglitz (1995: 219) note, "competitive equilibrium theory assumes that all
markets clear, including the labor market." Hence, the existence of unemployment
indicates that some forces prevent the labor market from reaching equilibrium. If
wages do not respond fast enough or do not change at all in case of disequilibrium
­ in other words, if they are rigid ­ unemployment may be unavoidable.
As Paqué (2003: 163f.) points out, unemployment can either be caused by
wage rigidities in the price level or the price structure. Specifically, if the
downward adjustment of the wage level does not function properly the labor
market will be faced with an excess supply of labor. Full employment will
similarly be prevented if the relative wages do not reflect an emerging structure of
disequilibria among the relevant labor markets ­ assuming, of course, that such
market-clearing wage structure can in principle be achieved by the Walrasian
auctioneer. Changes in the wage structure can have multiple sources; i.e., they
may result from technological progress or the international division of labor,
which increases wages in some sectors and puts downward pressure on them in
others.
Broadly speaking, rigidities are anything that prevent an adequate
"revaluation of human capital in the course of structural change in goods markets"
(Paqué, 2003: 164). It can be argued that, despite structural changes in the demand

Unemployment and Labor Market Rigidities
- 5 -
for labor and the composition of the workforce, full employment would still be
possible if individuals were sufficiently mobile; that is, if frictional costs to
change skills, occupations, or industries did not exist. Moreover, some labor
market rigidities could also be compensated if the capital market functioned
perfectly. As Pauqé explains, "the higher the costs of labour mobility, the more
one has to rely on the movement of capital to reach [...] full employment." In our
study, labor market rigidities will primarily be understood as inefficient market
institutions and (excessive) government interventions, which prevent market
clearance. Paradoxically, many of the discussed rigidities were initially designed
to cure some of the defects of an unregulated labor market.
Recognizing the importance of institutions
5
is a crucial element in
understanding the distinct performance labor markets. As Freeman (1998: 4)
emphasizes, institutions are what "differentiates real economies from the
Walrasian auctioneer model." He goes on to explain that it is not "the ethnic
make-up of people" that defines market outcomes, but institutions affecting
human decision making processes.
6
In order to compare market efficiency in
different economies the institutional setup can consequently not be left outside of
the analysis. Even to a higher extent than markets for ordinary goods and services,
labor markets are surrounded by "an array of institutional arrangements that form
a complex web of incentives and disincentives" (Siebert, 1997: 39). Naturally, this
web of rules and regulations is especially dense in European welfare states where
governments are particularly concerned with influencing market outcomes for the
benefit of a large number of people.
Although important, accepting the significance of institutions does not
make the analysis of particular labor market outcomes any easier. In fact, it is very
difficult if not completely impossible to isolate certain policies and evaluate their
impact as all rules and regulations have to be seen in the context of the entire
institutional system. This aspect should be kept in mind when discussing the
5
Institutions are any set of explicit or implicit rules, norms, or contractual arrangements as well
as actual organizations that govern human behavior. Their effect on market outcomes is
increasingly acknowledged in many disciplines of the social sciences (i.e., comp. North, 1987;
1990).
6
Freeman presents convincing evidence for this hypothesis by comparing the small income
distribution among men in Sweden with the wide distribution among men of Swedish ancestry
in the United States (Freeman, 1998: 8).

Theory, Empirical Evidence and Recent Labor Market Reforms in Germany
- 6 -
explanatory power of any given theoretical model as they often only focus on one
distinct aspect of the institutional setup.
Rigidities affect both the demand and supply side of labor; in some sense they can
even impair the market process as a whole. Specifically, due to taxes raised by the
government, minimum wage legislation, or employment protection mechanisms
the demand for labor might not reflect the true market demand, which ­ in the
framework of economic analysis ­ would only rest upon "genuine" market
elements such as the marginal product of labor or the price of a particular product.
Similarly, the supply of labor, which largely depends upon the opportunity cost of
individuals and their corresponding reservation wages,
7
might also be affected by
income taxes or the level and duration of unemployment benefits. Finally, the
market itself can be impaired when certain rules and regulations prevent the
demand and supply side of labor to reach market equilibrium. Rather than
affecting the incentive schemes of individuals, rigidities can therefore also have a
procedural impact in cases where the bargaining process is required to meet
specific standards (i.e., collective vs. individual bargaining regimes).
The rationale to focus on labor market rigidities as a decisive factor of the
European unemployment problem is straightforward. Beyond the fact that
rigidities are ubiquitous and therefore an integral part of any real world labor
market analysis, they also seem to offer a superior explanation for the problems
observed in Europe. To put it in a nutshell, rigidities as an explanatory factor are
especially appealing since alternative approaches have failed to convey a plausible
account of the sharp increase of European unemployment. Exogenous factors like
the oil shock in the early and late 1970s, a productivity slowdown in the 1980s
and 1990s as well as increased international competition from newly developing
countries may all have had a negative impact on European labor markets. Yet, as
Siebert (1997: 38) remarks, most of theses factors also affected the United States
where the increase of unemployment has by no means reached the intensity
observed in Europe.
8
7
A reservation wage is defined as the level of income that just covers all opportunity costs
associated with joining the labor market.
8
This list can easily be expanded by other factors, which especially affected European
economies: German unification, the collapse of the Soviet Union, and the fast decline of
agriculture in Southern Europe. Yet, as Glyn (2003) points out, these challenges should be
overcome by a sufficiently flexible labor market.

Unemployment and Labor Market Rigidities
- 7 -
Consistent with the Eurosclerosis hypothesis, the American labor market
could apparently better absorb the abovementioned shocks and quickly respond to
the new circumstances. As the OECD notes in its 1994 Jobs Study report, the
principal cause of high and persistent unemployment "is an inability of [...]
economies and societies to adapt rapidly and innovatively to a world of rapid
structural change" (OECD, 1994: vii). This appraisal is certainly still valid today,
especially considering that the magnitude and speed of change has rather
increased over the past couple of years.
If flexibility is the key for high labor market performance, European
countries seem to be ill prepared. Both, the wage elasticity of labor demand and
the unemployment elasticity of wage rates
9
indicate higher rigidity in European
countries as compared to the United States (comp. Siebert, 1997: 44). Especially
the short-run responsiveness is smaller in European economies than in the United
States; i.e., in Germany and France adjustments in employment to changes in the
wage rate take about twice as long as compared to the United States. Likewise,
Schröder (2000) and Prasad (2000) both report that the wage structure in West
Germany only marginally responded to a reduced demand for labor in the 1970s
and 1980s. Even in sectors that were severely struck by unemployment wages
remained relatively high. It is the other way around for upward changes of the
wage rate, which is likely driven by the supply side of labor. In European
countries, wages generally respond faster to positive signals from the labor
market, which arguably could take away some of the labor-augmenting effect of
an economic recovery (comp. Tab. 1).
Tab. 1: Wage Flexibility (% increase in wages in response to 1% decrease of
unemployment)
Country
Short-run
Long-run Country
Short-run
Long-run
Austria
1.43 3.11
Netherlands
0.66 2.28
Belgium
0.65 4.06
Norway
1.96 10.59
Denmark
0.66 1.74
Spain
0.17 1.21
Finland
0.48 1.55
Sweden
2.31 12.16
France
2.22 4.35
Switzerland
1.32 7.33
Germany (W)
0.55 1.01
U.K.
0.98 0.98
Ireland
0.80 1.82
Canada
0.50 2.38
9
The former measures the responsiveness of employment to changes in the wage rate whereas
the latter measures the responsiveness of wage rates to the level of unemployment.

Theory, Empirical Evidence and Recent Labor Market Reforms in Germany
- 8 -
Italy
2.07 12.94
U.S.A.
0.32 0.94
Source: Nickell (1997: 60)
Furthermore, the economic situation in Europe vis-à-vis the United States has not
been as weak as to justify the great discrepancy in their respective unemployment
rates. As Fig. 5 illustrates, employment growth is closely related to the overall
performance of an economy. Despite a similar economic development (comp. Fig.
6), European countries could only increase employment by a meager 12%
between 1970 and 1996 (plus 18 Mio.), whereas the U.S. created 47 Mio.
additional jobs and experienced an astonishing employment growth of 58%
(comp. Fig. 7).
Fig. 5: GDP Growth and Employment in the European Union (1985-2002)
Source: European Commission (2004: 19).

Unemployment and Labor Market Rigidities
- 9 -
Fig. 6: GDP Growth in OECD-Europe and the U.S.A. (1972-2000)
-4
-2
0
2
4
6
8
1973
1982
1991
2000
OECD-Europe
USA
Source: Own illustration. Data: World Bank (2002). Data excluding the Czech Republic, Hungary,
Poland, and Slovakia who became OECD members in the 1990s.
Fig. 7: Employment Growth in Europe and the U.S.A. (1970-1996)
Source: Siebert (1997: 38).
This deficiency to create new employment opportunities continues to be a
problem in many European countries. In 2003, the EU-15 only reached an average
growth rate of 0.2% compared to 0.9% in the United States ­ in some member
countries (including Germany) employment actually decreased (European
Commission, 2004: 19ff.). Latest labor market data report an increase of 337,000
jobs in the United States for October 2004 (BLS, 2004). Apparently, the

Theory, Empirical Evidence and Recent Labor Market Reforms in Germany
- 10 -
American labor market could once again recover faster from an economic shock
(i.e., global economic slowdown after the terrorist attacks of September 2001).
Finally, Siebert (1997: 39ff.) explains the importance of labor market
institutions for the European unemployment problem from a historical
perspective. He argues that the increase of unemployment coincides with "major
institutional change in Europe" at the end or shortly after the recovery process
following World War II toward more equity based labor market policies.
10
During
this period, the tax wedge widened, work-hours were reduced, employment
protection became more rigorous (i.e., lay-off restraints, severance pay
requirements), unemployment benefits were raised, and entitlement periods were
extended.
This trend can be traced for many European countries. In France, the minimum
wage was raised in 1968, 1974, and 1981 from approximately 40% of average
monthly earnings to about 60% in the mid-1990s (in the U.S.: 34% of median
earnings). Italy introduced various regulations on firing procedures until the late
1960 and experienced severe unemployment in the 1970s (which eventually led to
extensive labor market reforms toward more flexibility). In Germany, mandatory
social plans were introduced for the closing of a firm in 1973, unemployment
benefits were raised in 1975, and the share of social insurance payments increased
continuously from 13% to 18% of GDP. The Netherlands introduced guaranteed
income benefits in 1963 and requires advanced notification of lay-offs since 1976.
Even the United Kingdom experienced equity-based reforms, even though the
British labor market is still relatively unregulated compared to other European
countries: the Redundancy Payment Act of 1965, the Unfair Dismissal Law of
1971, and the Employment Protection Consolidation Act of 1978. Among the
wide array of rules and regulations, the literature has predominantly focused on
following rigidities to explain high unemployment in Europe (comp. Nickell,
1997):
· Labor standards (i.e., work-hours, minimum wage legislation)
· Employment protection (i.e., hiring and firing costs)
· Union density and coverage
10
For the EU-15 countries, productivity catch-up with the United States went from 0.52% (1890-
1950) to 2.11% (1950-1973) and 1.32% (1973/1987) respectively (comp. Maddison, 1992,
Table 5.2).

Details

Seiten
Erscheinungsform
Originalausgabe
Jahr
2004
ISBN (eBook)
9783832484651
ISBN (Paperback)
9783838684659
DOI
10.3239/9783832484651
Dateigröße
3.1 MB
Sprache
Englisch
Institution / Hochschule
Universität Potsdam – Wirtschafts- und Sozialwissenschaftliche Fakultät
Erscheinungsdatum
2004 (Dezember)
Note
1,0
Schlagworte
arbeitsmarktreform hartz arbeitlosigkeit rigiditäten agenda
Zurück

Titel: Unemployment and Labor Market Rigidities
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78 Seiten
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