external labour market flexibility: boosting productivity? based on a joint research with alfred...
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External labour market flexibility: boosting productivity?
Based on a joint research with Alfred Kleinknecht (TU Delft)
Robert VergeerTel: +31 (0)88 86 62 995Email: [email protected]
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Varieties of capitalism (Hall & Soskice)
'Liberal Market Economies' (LME) - 'Coordinated Market Economies' (CME)
LME countries:
• USA• Canada• Australia• Ireland• Great Britain• New Zealand
CME ('Rhineland'):
• Most continental European countries
• Japan
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Properties of LME versus CME'Liberal Market Economies' (LME) - 'Coordinated Market Economies' (CME)
LME (Anglo-Saxon):
•Easy hiring and firing•Shorter stay in same firm•Modest unemployment benefits•Weak trade unions•Labor relations are more 'conflictuous'•Wage bargaining more de-centralized: income distribution more unequal
CME (Rhineland):
• Protection against firing• Longer stay in same firm• Generous unemployment
benefits• Strong trade unions• Labor relations are more 'co-
operative'• Wage bargaining more
centralized: more income equality
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Study Effect (EPL +1 -> prod …)
Nickell and Layard (1999) +0.09
Buchele and Christiansen (1999) +0.45
Scarpetta and Tressel (2004) NS; negative only if combined with intermediate level of coordination for wage bargaining
Storm and Naastepad (2007) +0.2
Autor, Kerr and Kugler (2007) Positive
OECD (2007) -0.02
Dew-Becker and Gorden (2007) +1.2 (∆ EPL)
Lucidi and Kleinknecht (2009) Positive
Does labour market flexibility promote productivity growth?
Evidence from recent literature …
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Development of wages: Anglo-Saxon VS Continental European countries
Real wage (1960=100)
100
200
300
400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2004
Cont.-European Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
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Development of the wage share, 1960s-2000s (20 OECD countries)
Wage share
46%
48%
50%
52%
54%
56%
58%
60%
1963 1968 1973 1978 1983 1988 1993 1998 2003
Data: GGDC
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Does labour market flexibility promote productivity growth?Arguments in favour of flexible labour markets
Difficult and expensive firing of redundant personnel frustrates labour-saving process innovationsWith easier firing, shifting labour from old and declining industries to innovative activities is easierEasier firing enhances the inflow of 'fresh blood' (i.e. of people with novel ideas and networks)The (latent) threat of easy firing reduces shirking.
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Does labour market flexibility promote productivity growth?Arguments against flexible labour markets
Effects on firms’ innovative activity; Effects on workforce training; Effects on trust and loyalty.
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Does labour market flexibility promote productivity growth?Arguments against flexible labour markets
Effects on workforce training
Less investment in manpower training as pay-back periods become shorter;
Personnel have fewer incentives to invest in firm-specific knowledge;
Unions and employer-associations have less possibilities to set-up shared
training facilities.
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Does labour market flexibility promote productivity growth?Arguments against flexible labour markets
Effects on Trust and loyaltyGreater chances that trade secrets and technological knowledge will leak to
competitors, larger positive externalities leading to stronger under-investment
in knowledge;Easy firing of personnel will change power relations in firms. People will less
easily criticize (top) management decisions. Lack of critical feedback from the shop floor can favour problematic management practices;
People on the shop floor possess much of the (tacit) knowledge required for
process innovations. People threatened by easy firing have incentives not to
reveal knowledge relevant to labour-saving process innovations;
There is more need for monitoring and control. Anglo-Saxon countries have
substantially larger management bureaucracies which are frustrating for
creative people (Kleinknecht et al. 2006).
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Shares of managers in working population (19 OECD countries, 1984-1997)
Does labour market flexibility promote productivity growth?Arguments against flexible labour markets
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Does labour market flexibility promote productivity growth?Arguments against flexible labour markets
Effects on firms’ innovative activityA larger personnel turnover weakens the 'historical memory' of organizations and
the 'learning organization'.
Continuous accumulation of (tacit) knowledge for incremental innovation in a
Schumpeter II 'routinized' innovation regime requires a certain rigidity in labour
relations;
Creative destruction becomes more effective, as firms cannot flee to laying off
people or lowering wages when they are competed out by more innovative
firms;
Effects through (lower) wages;- Capital/labour substitution;- Induced innovation;- Vintage effect;- Creative destruction;- Demand pool/Verdoorn effects.
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Development of wages: Anglo-Saxon VS Continental European countries
Real wage (1960=100)
100
200
300
400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2004
Cont.-European Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
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Development of hours worked: Anglo-Saxon VS Continental European countries
Total hours worked (1960=100)
100
120
140
160
180
200
1960 1965 1970 1975 1980 1985 1990 1995 2000 2004
Cont.-European Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
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Development of GDP: Anglo-Saxon VS Continental European countries
Real GDP (1960=100)
100
200
300
400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2004
Cont.-European Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
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Development of labour productivity: Anglo-Saxon VS Continental European countries
labour productivity (1960=100)
100
200
300
400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2004
Cont.-European Anglo-Saxon
Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).
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Emperical strategy
Hypothesis: higher wage(share) causes higher productivity growth
Data for 20 OECD countries1960s – 2000sTaken from GGDC total economy databaseApproximately 800 observations
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Emperical strategy
Take into accountVerdoornUnobserved country and time effectsShare of servicesLagged productivityEmployment growth
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Emperical strategy
Control for reversed causation -> Instruments (Arellano Bond-procedure)Control for short term effects -> 5 year averagesControl for arbitrariness in choosing begin/end of time-span: roll-over central-year of averages (i.e. we run every regression 5 times and calculate average statistics)# observations: approximately 110
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Reported P-values and significance
P_1,5,10 counts how many of the 5 rolling regressions yield a coefficient with the respective significance level;
Significance based on: average z / average pBecause transformation from z to p is not linear
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10-04-23Titel van de presentatie
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(Z1,p1)=(-3;0.02)
(Z2,p2)=(-1;0.32)
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10-04-23Titel van de presentatie
23
(Z1,p1)=(-3;0.02)
(Z2,p2)=(-1;0.32)
Z_average = -2 -> implied p = 0.05p_average = 0.17
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10-04-23Titel van de presentatie
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(Z1,p1)=(-3;0.02)
(Z2,p2)=(-1;0.32)
Z_average = -2 -> implied p = 0.05p_average = 0.17
Z_average -> overconfidentp_average -> underconfident
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Results of Arellano-Bond regressions explaining the growth of labour productivity, on 5-year averaged values for 20 OECD countries from the 1960s to the 2000s Independents (I) (II) (III) (IV) (V) (VI)
w 0 . 46**/** 0 . 35*/** 0 . 44**/** 0 . 45**/** 0 . 41**/** 0 . 41/** P_1,5,10 1,4,5 1,2,4 1,4,5 2,3,4 0,3,5 1,2,3
ws 0 . 24***/*** 0 . 17**/** 0 . 23***/*** 0 . 23***/*** 0 . 22***/*** 0 . 21**/** P_1,5,10 4,5,5 2,3,4 2,5,5 4,5,5 4,5,5 3,4,5
Catchup -0 . 05*/** -0 . 06***/*** -0 . 06**/** -0 . 07*/** -0 . 05*/** -0 . 06**/*** P_1,5,10 1,2,3 4,5,5 1,3,4 2,2,3 1,3,4 2.4.4
Verdoorn ( Y ) 0 . 16/ 0 . 08/ 0 . 09/ 0 . 21/ P_1,5,10 0,0,0 0,0,0 0,0,0 0,0,0
1ˆ (a) -0 . 11/
(1 . 37) P_1,5,10 0,1,1
l -0 . 94/ P_1,5,10 0,0,0
Services -0 . 03/ P_1,5,10 0,0,0
Germany -0 . 02/** P_1,5,10 2,3,3
Sargan P =0.48 ; zP =0.45 P =0.55 ; zP =0.51 P =0.47 ; zP =0.45 P =0.68 ; zP =0.68 P =0.55 ; zP =0.54 P =0.54 ; zP =0.53
P_1,5,10 0,0,0 0,0,1 0,0,0 0,0,0 0,0,0 0,0,0 Hansen P =0.45 ; zP =0.45 P =0.82 ; zP =0.83 P =0.46 ; zP =0.46 P =0.54 ; zP =0.54 P =0.42 ; zP =0.42 zP =0.59 ; zP =0.61
P_1,5,10 0,0,0 0,0,0 0,0,0 0,0,0 0,0,0 0,0,0 Ar2 P =0.48 ; zP =0.46 P =0.60 ; zP =0.42 P =0.32 ; zP =0.28 P =0.46 ; zP =0.42 P =0.43 ; zP =0.41 P =0.39
; zP =0.36 P_1,5,10 0,0,0 0,0,0 0,0,1 0,0,0 0,0,0 0,0,0
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Conclusions
A return of the wage share from the value of the 2000s (51%) to the value in the 1970s (57%) would cause a rise in productivity growth of 1.5%;
This is caused by both direct effects from higher wages as well as by indirect effects because flexible labour market undermine organisational innovative capacity.
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External labour market flexibility: boosting productivity?
Robert VergeerTel: +31 (0)88 86 62 995Email: [email protected]