Labour market institutions and labour market performance

Abstract

This paper studies the relationship between labour market institutions and policies and labour market performance using a new and unique dataset that covers the countries of Eastern Europe and Central Asia, which in the last two decades experienced radical economic and institutional transformations. We document a clear trend towards liberalization of labour markets, especially in the countries of the former Soviet Union, but also substantial differences across the countries studied. Our econometric analysis implies that institutions matter for labour market outcomes, and that deregulation of labour markets improves their performance. The analysis also suggests several significant interactions between different institutions, which are in line with the idea of beneficial effects of reform complementarity and broad reform packages.

Labor Market Institutions and Labor Market Outcomes in Transition Economies

“…The size of the informal economy is large in the region (above 36%), but varies considerably across the countries. The other labor market outcomes are somewhat weaker in the sampled countries as compared with the developed economies (see also Lehmann and Muravyev, 2012). However, there is also considerable variation across the countries and over time.…”

“…In previous work (Lehmann and Muravyev, 2012), from which we report here, we also looked at the question whether reform complementarities improved labor market performance; that is, whether reforming more than one labor market institution brought larger benefits than confining the reform effort to one institution or policy. There is convincing evidence in OECD countries, at length debated in the literature, which shows that countries with similar single institutions might experience very different labor market outcomes because these single institutions are interacted with other single institutions, which in turn differ from country to country.…”

“…In Lehmann and Muravyev (2012), we add pairwise interactions of labor market institutions and policies to the baseline specification for the full sample of transition countries. Given the low number of degrees of freedom, only one such interaction is inserted at a time.…”

“…The latter include employment protection legislation (OECD version II), expenditures on active labor marker programs, tax wedge, unemployment benefit size (measured as average benefit to average wage), unemployment benefit duration, and union density. The details about the variables included in the database can be found in Lehmann and Muravyev (2012).…”

What Did the Study of Transition Economies Contribute to Mainstream Economics?

“…An example of the latter is the investigation of labour market institutions in transition countries by Lehmann and Muravyev (2012).…”