Unemployment at risk: the policy determinants of labour market exposure to economic shocks

Abstract

This paper examines the vulnerability of labour markets to adverse economic shocks. We define labour market exposure as the cumulated amount of excess unemployment generated by a shock before unemployment returns to steady-state. We use a panel of 19 countries covering the period 1985-2010 to assess the influence of labour market policies on labour market exposure, which is also calculated country by country. We find that less generous unemployment insurance, more active labour market policies or a lower minimum wage imply a trade-off between average unemployment and labour market exposure, as they help lowskilled workers to get out of unemployment at the cost of increased vulnerability to adverse shocks. On the other hand, reducing the tax wedge is conducive to both lower steady-state unemployment and labour market exposure.--Alain de Serres and Fabrice Murtin U n e m p l o y m e n t a t r i s k Economic Policy

Firm size distribution and employment fluctuations: Theory and evidence

“…A large number of papers confirm Okun's conjecture but also find that the impact varies across countries because of differences in their labour market regulations and other institutional features (e.g. Nickell and Layard;1999;Ball et al 2013;De Serres and Murtin, 2014). In this context too our finding is pertinent in that we show that the link between output and employment depends on country and industry differences captured by the distribution of firms.…”

Active labour-market policies and output growth: Is there a causal relationship?

“…De Serres & Murtin (2013) find that while program-spending has a decreasing effect on unemployment during normal times, it can raise the sensitivity of unemployment to short-term economic fluctuations and this may on balance lead to higher total volatility of unemployment. Indeed, based on data from OECD countries during 1985, De Serres & Murtin (2014 present simulation results indicating that ALMPs in general fail, following an adverse shock, to reduce overall labour-market exposure, as measured by the cumulated amount of unemployment in excess of its long-term level.…”

The distributional impact of labour market reforms: A model-based assessment

“…In particular, less generous unemployment insurance, more ALMP, and lower minimum wages accelerate the exit of low-skilled workers from unemployment, but lower benefits and wage floors make them also more vulnerable to adverse income shock. Reducing the labour tax wedge avoids the trade-off between average employment gains and disposable income in downturns according to De Serres and Murtin (2014). Ostry et al (2018) present empirical evidence for broad indicators, a wide range of structural reforms, which also includes financial liberalisation and basic institutional reforms, and a large sample of advanced, emerging and developing economies.…”

“…The work by De Serres and Murtin (2014) takes a different perspective and contrasts the longterm (average) employment effects of labour market policies with the policies' impact on the response of unemployment to adverse shocks, where the latter alludes to the concept of economic resilience to shock as discussed, e.g., in Duval and Vogel (2008). The empirical evidence for 19 OECD countries suggests trade-offs between long-term levels of employment and short-term employment and income stability during specific phases of the business cycle.…”