Formal and Informal Labour Markets: Challenges and Policy in the Central and Eastern European New EU Members and Candidate Countries

The paper aims at comparing the formal and informal labour marketsin the Central and Eastern European new EU Member States andcandidate countries of the European Union. First, the currentsituation of the labour market is described, focusing on therecent developments since the breaking up of the East. Thenthe policy design of these labour markets is depicted and itseffects on formal and informal labour markets. The most importantchallenges for employment policy as well as the effects of enlargementon the labour markets are analysed. The paper ends with a shortsummary. (JEL J21, J23, H26, H11, O17, O57)     

Welfare Migration: Is the Net Fiscal Burden a Good Measure of its Economic Impact on the Welfare of the Native-Born Population?

Migration of young workers (as distinct from retirees), evenwhen driven in by the generosity of the welfare state, slowsdown the trend of increasing dependency ratio. But, even thoughlow-skill migration improves the dependency ratio, it neverthelessburdens the welfare state. Recent studies by Smith and Edmonston(1977), and Sinn et al. (2003) comprehensively estimate thefiscal burden that low-skill migration imposes on the fiscalsystem. However an important message of this paper is that inan infinite-horizon set-up, one cannot fully grasp the implicationsof migration for the welfare state, just by looking at the netfiscal burden that migrants impose on the fiscal system. Inan infinite-horizon, overlapping generations economy, this netburden, could change to net gain to the native born population.(JEL F22, H3, J10)     

Welfare Leakage and Immigration Policy

This paper analyzes the interaction between the welfare stateand immigration policy. We establish a negative relationshipbetween the number of dependents and the extent of the welfarestate due to the leakage of benefits. We also explain the determinationof immigration policy as the outcome of a lobbying game betweendomestic interest groups and the government. Our results indicatethat there is evidence for welfare leakage and for lobbyingas a determinant of immigration policy. In our baseline specification,a 10 percentage points increase in the share of dependents leadsto a 7–10 percentage point decrease in the labor tax rate.Furthermore, an increase by 10 percentage points in union densityleads to a decrease of one percentage point in the share ofimmigrants in the population. In the context of EU enlargementand the ensuing migration flows, our model predicts a reductionin the size of the welfare state in the old member countries.(JEL H5, J1, J61)     

Adam Smith and the division of labour: is there a difference between organisation and market?

The paper claims that, in The Wealth of Nations, the divisionof labour refers simultaneously to two different things: a socialdivision of labour and an organisational division of labour.The central point is that the organisation of work (the organisationaldivision of labour) in the firm is the logical counterpart ofthe social division of labour, and that these reflect two inseparableaspects of the process of the division of labour. Smith is thusconcerned with organisations as well as with markets, each functioningaccording to the same principle. Hence, Smith does not believethat the organisational and the social divisions of labour arefundamentally different, although he does recognise some variationbetween them and describes different states of the divisionof labour within the firm, liberal and capitalist.     

Efficiency and Equality in the Labour Market

I review theoretical arguments suggesting that certain labourmarket institutions can be justified for economic efficiencyreasons. In models with intrinsic market failures, "rigidities"like employment protection legislation and institutional wagecompression may push the economy closer to the efficient frontier.I discuss recent empirical evidence on income inequality, povertyand income mobility in OECD countries, and I conclude that thewelfare states of Northern Europe score relatively well on allcounts. Finally, I discuss labour market reforms that may improveefficiency without violating European voters' preference forequality.(JEL H30, J30, J50)     

Labour market implications of EU product market integration

European labour markets are in a state of flux due to the changing market situation induced by international integration. This process affects wage formation through more fierce product market competition and increased mobility of jobs. This development is by some observers taken to enforce labour market flexibility, while for others it signals an erosion of social standards and in turn possibly the welfare society. Since labour is not very mobile in Europe, the effects of international integration on labour markets are mostly indirect via product market integration. We review the channels through which product market integration affects labour markets and perform an empirical analysis of the convergence and interdependencies in wage formation among EU countries. We find that integration is changing labour market structures and inducing wage convergences as well as stronger wage interdependencies, but it is a gradual process. Moreover, the present study does not support the view that international integration will lead to a 'race to the bottom' and rapidly erode domestic labour markets standards, nor that it will relieve politicians of the need to consider labour market reforms to improve labour market performance.     

Labor Market Institutions, Wages, and Investment: Review and Implications

Labor market institutions, via their effect on the wage structure,affect the investment decisions of firms in labor markets withfrictions. This observation helps explain rising wage inequalityin the US, but a relatively stable wage structure in Europein the 1980s. These different trends are the result of differentinvestment decisions by firms for the jobs typically held byless skilled workers. Firms in Europe have more incentives toinvest in less skilled workers, because minimum wages or unioncontracts mandate that relatively high wages have to be paidto these workers. I report some empirical evidence for investmentsin training and physical capital across the Atlantic, whichis roughly in line with this theoretical reasoning. (JEL E22,E24, J23, J24, J31)     

Political Participation of Mobile Citizens and the Size of the Welfare State

This paper deals with the implications of personal mobilityfor political participation of citizens and for the resultingsize of the welfare state. We show that mobility of citizensmay influence the individual decision to participate in thepolitical process and thereby may change policy outcomes. Ifcitizens who prefer a larger public sector are relatively immobile,the size of the welfare state may increase with mobility. (JELD72, J61)     

Unskilled Migration: A Burden or a Boon for the Welfare State?

As relatively low earners, migrants are net beneficiaries of the welfare state. Therefore, in a static setup, migration may be resisted by the entire native-born population. However, it is shown that in a dynamic setup with a pension system, which is an important pillar of any welfare state, migration is beneficial to all income (high and low) and all age (old and young) groups, when the economy has good access to international capital markets. The pro-migration feature of the dynamic model is weakened and possibly overturned when the economy does not have good access to such markets. In this case, to the extent that factor prices are significantly affected by migration because of low substitution between labour and capital, low-skill native born and possibly also high-skill native born may lose.     

A Note on Changes in the Earnings and Unemployment Structures in Spain Evidence from the Luxembourg Income Study

This note tests whether the extraordinary rise in Spanish unemploymentin the 1980s can be traced back to rigidities in the earningsstructure in the face of relative net demand shocks againstthe unskilled (this claim is also known as the "Krugman hypothesis").I can establish that youth joblessness is key to the Spanishunemployment problem, but sampling procedures in the data setmake it impossible to track the youth unemployment problem acrosstime in a satisfactory way. Even though high youth unemploymentis consistent with the Krugman hypothesis, substantial skillupgrading of the Spanish labour force in the 1980s explainswhy the low education groups did not experience an increasein relative unemployment. (JEL J21, J31, J64)     

Canadian regional labour market evolutions: a long-run restrictions SVAR analysis

Canada's high reliance on commodities can work against its constitutionally mandated goal of regional equity in economic development, while also inhibiting macroeconomic performance and limiting monetary policy effectiveness. Yet, flexible and integrated regional labour markets can help achieve both equity and macroeconomic goals. Therefore, this study examines the dynamics of Canadian provincial labour markets using a long-run restrictions structural vector autoregression (SVAR) model. Labour market fluctuations are decomposed into the parts arising from shocks to labour demand (new jobs), labour supply through migration (new people) and internal labour supply (original residents). The results suggest that demand innovations primarily underlie provincial labour market fluctuations. Despite significant geographic and language barriers that could impede their performance, there also is little overall evidence to suggest that provincial labour markets are more sluggish or less flexible than US state labour markets. Finally, original residents benefit slightly more from increased provincial labour demand compared to findings for US states.     

Factor mobility and fiscal policy in the EU: policy issues and analytical approaches

Increased integration of labour and capital markets creates significant challenges for the welfare states of modern Europe. Taxation of capital and labour that finances extensive programmes of cash and in-kind redistribution creates incentives for capital owners and workers to locate in regions where they obtain favourable fiscal treatment. Competition among countries for mobile resources constrains their ability to alter the distribution of income and may lead to reductions in the size and scope of redistributive policies. Mobility of labour and capital is imperfect, however. Recent trends indicate that labour and capital are neither perfectly mobile nor perfectly immobile, but rather adjust gradually to market conditions and economic policies. This paper presents an explicitly dynamic analysis showing that governments can achieve some redistribution when it is costly for factors of production to relocate. As the costs of factor mobility fall, however, the effectiveness of redistributive policies is more limited, and governments have weaker incentives to pursue them. Liberalized immigration policies, EU enlargement, and other steps that promote integration of the factors markets of Western Europe with those of surrounding regions thus present a challenge to policy-makers if they also wish to maintain fiscal systems with extensive redistribution.     

What's Left for ‘Social Europe’? Brexit and Transnational Labour Market Regulation in the UK-1 and the EU-27

The paper examines UK government positions on the regulation of transnational labour in the context of Brexit. Through an analysis of EU regulations on posted workers – the practice whereby a company based in one EU member state sends workers to carry out a service in another EU member state – the paper argues that the UK has consistently advocated further liberalisation of transnational labour markets in EU level decision-making, a position consistent with promoting increasingly ‘flexible’ labour markets at home. Brexit marks a turning point. Demands from British workers for stronger protection against liberalising pressure help explain the UK's recent shift towards relaxing its opposition to ‘market-correcting’ EU initiatives like the revised posted worker directive. Brexit provides a window of opportunity for the revitalisation of ‘Social Europe’ in the EU-27, without a longstanding veto player at the bargaining table, but one more likely focused more on upholding national labour protections than initiating new supranational policies.     

Lessons for Europe from the U.S. Growth Resurgence

This paper analyses the sources of U.S. labour productivitygrowth in the late 1990s and presents projections for both outputand labour productivity growth. We show that investment in informationtechnology (IT) played a substantial role in the U.S. productivityrevival and that similar trends are evident in data for otherleading OECD countries. We then outline a methodology for projectingtrend output and productivity growth for the broadly definedU.S. economy. Our base-case projection puts trend productivitygrowth at 1.78 percent per year over the next decade with arange of 1.14 to 2.38 percent, reflecting fundamental uncertaintiesabout the rate of technical progress in IT-production and investmentin IT-equipment and software. Our central projection is belowthe average growth rate of 2.07 percent during 1995 -2000. Similarprojections for Europe must await more complete information.(JEL J2)     

EU Enlargement and the Future of the Welfare State

The eastern enlargement of the EU resembles German unification in its momentousness. Whereas the latter led to a 26% increase in the population of the Federal Republic, the former will increase the population of the EU by 28% if all ten entry aspirants are accepted. A special problem will be posed by migration. Given the existing wage differences between eastern and western European countries, a massive westward migration can be expected after enlargement. A temporary east–to–west migration until the eastern countries create an efficient capital stock makes economic sense if this is driven by wage differences and meets with a flexible labour market. Migration does not make economic sense, however, if, and to the extent that, it is induced by the current social assistance systems. Moreover, welfare–motivated migration would create competition among western European states to frighten off potential migrants, and this would lead to an erosion of the traditional social welfare state. If the EU plan incorporated limitation on the free movement of labour, beneficial migration would also cease. A better solution would be to limit access to the western social systems, at least for a transitional period, in order to filter out migration induced by differing social standards. An EU–wide application of the home–country principle in the granting of social benefits would achieve this goal.     

Commentary. 'Work first': workfare and the regulation of contingent labour markets

The paper presents a critical review of UK and US welfare-to-workstrategies, stressing their implications for changing formsof labour regulation. The favoured policy orientation - 'workfirst' - forcefully redistributes the risks and burdens of job-marketinstability from the state to unemployed individuals, the solutionto whose 'welfare dependency' is presented in terms of a one-waytransition into (low) waged work. At a systemic level, the analysissuggests that a regressive regulatory accommodation may be emergingbetween mandatory welfare-to-work programming on the one handand the lowest reaches of deregulated, 'flexible' labour marketson the other, as the destabilisation of welfare via work-activationmeasures creates a forced labour supply for contingent jobs.     

What ever happened to Germany? Is the decline of the former european key currency country caused by structural sclerosis or by macroeconomic mismanagement?

This paper challenges the institutional sclerosis view of the German crisis according to which rigid labour markets and generous welfare state institutions have driven Germany into its position as ‘Europe's sick man’. In general, the view is not convincing, because the underlying hypotheses about the effects of labour market regulation and welfare state institutions on employment and growth cannot unambiguously be derived from modern labour market theory and are at least partially at odds with accepted empirical findings. In particular, the explanation is unconvincing, because in international comparison Germany's labour market and welfare state institutions are simply not as sclerotic as often supposed. In most of the aggregate indicators for structural rigidities Germany is not worse than the average OECD or EU country. Moreover, there is a macroeconomic explanation focusing on the combined effects of restrictive and pro‐cyclical monetary, fiscal and wage policies in Germany that is broadly consistent with modern macroeconomic theory and is supported by empirical data.     

National Labor Market Institutions and the EU Integration Process

This paper outlines theoretical insights regarding the motivationand effects of labor market institutions, and reviews empiricalstudies of relevant evidence from European and other countries'historical experience. Institutional interference with laissezfaire labor market outcomes has both economic and distributionalimplications, which depend on the structure of markets and onthe details of policy implementation. The resulting conceptualframework is brought to bear on a discussion of possible reformsof European labor markets in the context of the Economic andMonetary Union process. (JEL F02, J00)     

On the Role of Labour Market Reform for the Enlargement of a Monetary Union

This paper studies the incentives to join a monetary union,and the incentives to reform within a monetary union and withinthe candidate countries, respectively. We present some "ordersof magnitude" evidence on the size and balance of the incentiveeffects for joining and being joined, and on the desirabilityof reform in and out of the existing EMU in Europe. It is foundthat countries will only want to join a monetary union wherethere has been sufficient labour market reform, and where labourmarkets are more flexible than their own. But existing memberswill want the same properties of their new partners as well.(JEL F02, F15, F33, F 42)     

Keynesian Economics, Monetary Policy and the Business Cycle - New and Old

After a brief review of the main differences between New andOld Keynesian economics from the sixties this paper focuseson a tension between traditional sluggish measures of potentialoutput commonly used by policymakers and the New Keynesian (NK)notion of this variable which conceptualizes it as the levelof output that would have been produced under perfect competitionhad all prices and wages been flexible. The paper shows that,under monopolistic competition, NK potential output is oftenmore volatile than the level of output produced under stickyprices and wages implying either of the following. Real lifepolicymakers mistakenly target smooth versions of output or(since actual economies are monopolistically rather than perfectlycompetitive) the flexible price and wage equilibrium does notnecessarily maximize welfare. The paper shows, that dependingon the shape of the utility function and of the distributionof productivity shocks either case is possible and proposesa criterion for discriminating between them. (JEL E3, E4, E5,E6)