Open Access

Unemployment Impact of Product and Labor Market Regulation: Evidence from European Countries

Céline Piton
Céline Piton
 and 
François Rycx
François Rycx
   | Sep 14, 2019
IZA Journal of Labor Policy's Cover Image
About this article
Previous Article
Next Article
Cite
Published Online: Sep 14, 2019
Page range: -
DOI: https://doi.org/10.2478/izajolp-2019-0006
Keywords
© 2019 Céline Piton, François Rycx, published by Sciendo
This work is licensed under the Creative Commons Attribution 4.0 Public License.

Figure 1

Unemployment rate for different types of workers (2016, average of the 24 considered European countries, in the percentage of the corresponding labor force aged 15–74 years).Source: EC.
Unemployment rate for different types of workers (2016, average of the 24 considered European countries, in the percentage of the corresponding labor force aged 15–74 years).Source: EC.

Figure 2

PMR indicator – OECD definition.Source: OECD. EPL, employment protection legislation.
PMR indicator – OECD definition.Source: OECD. EPL, employment protection legislation.

Figure 3

EPL indicator – OECD definition.Source: OECD. PMR, product market regulation.
EPL indicator – OECD definition.Source: OECD. PMR, product market regulation.

Figure 4

Product market reforms between 1998 and 2013 (change in the PMR OECD index).Note: Luxembourg, Slovak Republic, Estonia, and Slovenia are not presented in the graph because data are not available at the beginning of the period.Source: OECD. PMR, product market regulation.
Product market reforms between 1998 and 2013 (change in the PMR OECD index).Note: Luxembourg, Slovak Republic, Estonia, and Slovenia are not presented in the graph because data are not available at the beginning of the period.Source: OECD. PMR, product market regulation.

Figure 5

Labor market reforms between 1998 and 2013 (change in the EPL OECD index).Note: Estonia, Luxembourg, Slovenia, and Iceland are not presented in the graph since data on their EPL are available only over the period 2003–2013.Source: OECD. EPL, employment protection legislation.
Labor market reforms between 1998 and 2013 (change in the EPL OECD index).Note: Estonia, Luxembourg, Slovenia, and Iceland are not presented in the graph since data on their EPL are available only over the period 2003–2013.Source: OECD. EPL, employment protection legislation.

Figure 6

Relationship between unemployment rate and regulatory indices (2013).Source: EC, OECD.
Relationship between unemployment rate and regulatory indices (2013).Source: EC, OECD.

Relationship between the absolute values of the coefficients: Are they statistically different for different types of workers?

GenderAgeEducation
FemaleMale15-24(Y)25-49 (M)50-74 (0)LowMiddleHigh
EPLF=MM=FY>M* and Y>0**M<Y* and M=O0<Y** and 0=ML=M and L=HM=L and M=HH=L and H=M
Individual dismissalsF=MM=FY>M*** and Y>0***M<Y*** and M=O0<Y*** and 0=ML=M and L=HM=LandM>H**H=LandH<M**
Collective dismissalsF=MM=FY=M and Y=OM=YandM=O0=Y and O=ML=M and L=HM=LandM>H**H=LandH<M**
Temporary employmentF=MM=FY=M and Y=OM=YandM=O0=Y and O=ML>M* and L>H**M<L*andM=HH<L**andH=M
PMRF=MM=FY=M and Y=OM=YandM=OO=Y and O=ML=M and L>H***M=LandM>H*H<L***andH<M*
State controlsF<M*M>F*Y=MandY>0*M=YandM=O0<Y* and 0=ML=M and L=HM=LandM>H**H=LandH<M**
Barriers to entrepreneurshipF=MM=FY=M and Y=OM=YandM=OO=Y and O=ML>M*andL>H***M<L*andM>H***H<L***andH<M***
Barriers to trade and investmentF=MM=FY=MandY>0*M=YandM=O0<Y*and0=ML=M and L=HM=LandM>H**H=LandH<M**

Impact of EPL and PMR on the unemployment rate

(1)(2)(3)(4)(5)(6)
Employment protection0.97*-1.37***-6.56***-6.36***-5.96**-6.68**
(0.52)(0.37)(1.30)(2.06)(2.57)(2.75)
PMR3.38***6.05***3.45***3.97***3.29***3.89***
(0.93)(0.57)(0.93)(1.19)(1.01)(1.18)
EstimatorOLSOLSFEIV-FEIV-FEIV-FE
Control variablesYesYesYesYesYesYes
Country fixed effectsNoNoYesYesYesYes
Year fixed effectsNoYesYesYesYesYes
PMR endogeneityNoNoNoYesNoYes
EPL endogeneityNoNoNoNoYesYes
Adjusted R20.830.880.350.390.440.45
Number of observations317317317281279277
Weak identification test–––327.17137.3469.02
Overidentification test–––0.300.840.60
Endogeneity test–––0.190.950.42

Robustness checks of the impact of EPL and PMR on the unemployment rate

Baseline regressionExcluding PT, GR, ES, and ITBaseline regression with interaction termExcluding PT, GR, ES, and IT and adding interaction term
Employment protection-6.56***4.21***-5.91***4.18***
(1.30)(1.59)(1.34)(1.61)
PMR3.45***2.83***3.53***2.82***
(0.93)(0.78)(0.93)(0.78)
EPL × PMR6.68**-0.60
(3.36)(4.59)
EstimatorFEFEFEFE
Country fixed effectsYesYesYesYes
Year fixed effectsYesYesYesYes
Adjusted R20.350.280.360.28
Number of observations317254317254

Summary of empirical findings on the impact of PMR and EPL reforms on (un)employment

StudiesDataDependent variableDefinition: PMR and EPLMethodologyEndogeneity testsResults
Boerietal. (2000)19 OECD countries, 1982-1995Nonagricultural employment rateEPL: OECD indicator for permanent and temporary workers PMR: OECD economy-wide indexStep 1: reduced-form model for EPL; step 2: country-specific effect; step 3: bivariate correlation between the unexplained country-specific effects and the PMR index–Countries with restrictive PMR tend to have lower employment rates in the nonagricultural business sector. EPL has a negative impact on employment rate (90% significance)
Nicoletti et al (2001)20 OECD countries, 1982-1998Employment ratePMR: OECD sectoral indexReduced-form models estimated with fixed and random effects–Anticompetitive PMR has significant negative effects on nonagricultural employment rate. In some countries, the product market regulatory environment may account for up to 3 PP of deviations of the employment rate from the OECD average
Baker et al (2002)20 OECO countries, 1960-1999Unemployment rateEPL: OECD indicatorFeasible generalized least squaresDo not consider EPL as endogenous. Control for the endogeneity of ALMPs by instrumenting it using countries' average ALMP value over the period 1985-1999No argument in favor of labor market deregulation since nearly all the change in structural unemployment rates was accounted for by country-specific effects not by institutional factors
Belot and Van Ours (2004)17 OECD countries, 1960-1999Unemployment rateEPL: index based on three subindexes (protection of open-ended contracts, fixed-term contracts, and temporary work agencies), own computation, scale of 0-1FE regressions taking interactions between labor market institutions into account–No clear causal relationship between employment protection and unemployment rate. Estimating the regression with fixed effect made the coefficient of employment protection statistically insignificant
Nicoletti and Scarpetta (2005)20 OECD countries, 1980-2002Nonagricultural employment rateEPL: OECD indicator for permanent and temporary workers PMR: OECD sectoral indexFixed effect: regression–Significant employment gains can be obtained by deregulating product markets in overly regulated countries. EPL has a negative impact on employment rate but this impact is not significant in all specifications, particularly when they control for outliers and add country fixed effects
Bassanini and Duval (2006a)20 OECD countries, 1982-2003Unemployment rateEPL: OECD indicator for permanent and temporary workers PMR: OECD sectoral indexFeasible GSL with fixed and random effectsIV estimation using lagged institutional variables (2-year lag) PMR and EPL coefficients become statistically insignificantPMR raise aggregates unemployment. EPL effect on unemployment is statistically insignificant
Berger and Danninger (2007)27OECD countries, 1980-2004Employment growth rateEPL: OECD indicator for permanent and temporary workers PMR: OECD economy-wide indexTime series panel techniques with fixed and random effects, IV and GMMGMM based on Arellano and Bond (1991) with a four-lag structure Same result as other specifications but coefficients become not statistically significantLower levels of product and labor market regulator foster employment growth
Fiori et al (2007)20 OECO countries, 1980-2002Nonagricul- tural employ- ment rateEPL: OECD indicator for permanent and tempo- rary workers PMR: OECD sectoral indexFeasible GLSControl function approach of Rivers and Vuong (1988) finds that there is no endog- eneity and thus GLS results are consistentAnticompetitive PMR has a negative impact on employment rate Tight labor market regulation tends to reduce employment
Griffith et al. (2007)14 OECO countries, 1986-2000Unemploy- ment ratePMR: captures changes in the extent of competition using a measure of the average level of firm profitability+2 indicators based on an opinion sur- vey and 1 reported by the Fraser InstituteFixed-effect regressionTwo-stage estimation approach: first, the impact of PMR and LMR on profitability, and then, the impact of profitability on the unemployment rateIncreased competition reduces unemployment
Kugler and Pica (2008)Italian Social Security employer- employee panel data, 1986-1995Accession or separation between worker and firmEPL: dummy variable which takes the value of 1 after 1990 (after the reform) and a dummy variable which takes the value of 1 if the worker is employed in a small firmDifference-in-difference approach by comparing worker and job flows in small and large firms before and after the reformUse the 1990 reform on workers and job flows (increasing dismissal costs for small firms) as a natural experimentThe increase in dismissal costs decreased accession and separation rates for workers in small relative to large firms. Negligible impact on net employment
Amable et al. (2011)18 OECD countries, 1930-2004Jobless, inactivity and unemploy- mentEPL: model the evolution of the OECD index using EPL index from the FRDB Social Reforms: Data- base as well as country dummies and time trends as regressors PMR: OECD index (economy wide and sectoral)Limited dependent variable model with country dum- mies + fixed-effect vector decompositionIV estimation using lagged institutional variables Finds that there is no endogeneityRegressions on joblessness show a negative impact of PMR and a positive impact of EPL on employment. Regression using sectoral PMR index shows not statistically significant impact on joblessness Specifications for inactivity and unemployment show that the model specification fits more satisfactorily the inactivity rather than the unemployment component of joblessness. Unemployment equation: PMR always positive and statistically significant (economy-wide index) and EPL negative but not statistically significant
De Serres et al. (2012)21 OECD countries, 1985-2007Unemploy- ment rateEPL: OECD indicator on regular contracts + share of workers with fixed- term contracts PMR: OECD sectoral indexDynamic unemployment equation taking the per- sistence of unemployment into account estimated using FE LSDV estimator + NLS estimatorDifference GMM: The impact of EPL on regular contracts remains positive and significant. However, the impact of PMR becomes negative and insignificantEasing of EPL on regular contracts reduces the persistence of unemployment (statistically significant only in half of the specifications including the one based on diff-GMM) More competition-friendly PMR can reduce structural unemployment but the impact is not robust to different specifications
Malk (2013)Micro- data from labor force survey for Es- tonia and Lithuania, 2007-2011Worker flows out from em- ployment and into employ- mentEPL: dummy variable which takes the value of 1 after the reform and a dummy variable which takes the value of 1 if the worker is in EstoniaDifference-in-difference approach by comparing labor flows in Lithuania and Estonia before and after the reformAnalyze the Estonian reform in mid-2009 decreasing EPL (for all workers) and use Lithuania as a controlLabor flows out of and into employment increased in Estonia relative to Lithuania. Statistically significant only for flows out of employment
Bordon et al. (2016)30 OECD countries, 1980-2013Variation in the employ- ment rate (from 1 to 5 years)EPL: OECD indicator on regular contracts PMR: OECD sectoral indexDefine two reform variables (for PMR and EPL) which take the value of 1 when the index drop by more than 2 standard deviations of the change in the indicator overall observations; esti- mation using local projections techniquesAIPW method that esti- mates the treatment effects of reforms while controlling for potential selection bias The positive effect of reforms remains ever after controlling for endogeneityStructural reforms have a lagged but positive impact on employment Both labor and product market reforms increase employment rates by about a little over 1% pain: over 5 years
Gal and Hijzen (2016)10 regulat- ed indus- tries in 18 advanced economies, 1998-2013Employment based on the firm-level da- tabase OrbisPMR OECD sectoral indexImpulse response function using the local projection methodInstrumental variablesProduct market reforms have positive effects on employment and their effects increase overtime

Impact of different types of PMR on the unemployment rate

(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)
Employment protection1.39*-0.60-6.16***-5.85***-6.30*-7.67*0.15-1.98***-6.21***-6.12***-7.20***-8.32*
(0.54)(0.67)(1.23)(1.92)(2.36)(2.52)(0.50)(0.27)(1.24)(1.89)(2.37)(2.52)
PMR
1) State control-0.14 (0.64)0.67 (0.46)-1.74* (0.54)-2.87* (0.76)-1.48** (0.61)-2.35* (0.75)
a) Public ownership0.25-0.31-0.14-0.640.12-0.30
(0.25)(0.30)(0.39)(0.43)(0.38)(0.48)
b) Price controls and C&C0.340.88**-2.20***-2.78***-2.06***-2.58***
(0.62)(0.45)(0.46)(0.67)(0.54)(0.68)
2) Barriers to entrepreneurship3.15***4.64***3.91***4.68***3.16***3.97***
(0.40)(0.45)(0.72)(1.04)(0.83)(0.98)
a) Regulatory and admin opacity1 18***1 14***1 43***1 64***1 15***1 33***
(0.15)(0.15)(0.29)(0.46)(0.32)(0.43)
b) Administrative burdens on startups2.92***3.26***2.24***2.80***1.72***2.31***
(0.34)(0.31)(0.56)(0.66)(0.62)(0.67)
c) Barriers to competition-2.80***-0.58*0.480.750.710.92
(0.51)(0.31)(0.57)(0.65)(0.50)(0.65)
3) Barriers to trade and investment-0.460.801.53*2.33*1.75*2.52*
(0.75)(1.07)(0.47)(0.94)(0.60)(0.89)
a) Barriers to FDI-0.45-0.741.89*1.641.551.83
(0.90)(0.87)(1.10)(1.36)(1.00)(1.36)
b) Regulatory barriers0.401.12**0.290.840.440.85
(0.39)(0.47)(0.38)(0.58)(0.38)(0.54)
EstimatorOLSOLSFEIV-FEIV-FEIV-FEOLSOLSFEIV-FEIV-FEIV-FE
Control variablesYesYesYesYesYesYesYesYesYesYesYesYes
Country fixed effectsNoNoYesYesYesYesNoNoYesYesYesYes
Year fixed effectsNoYesYesYesYesYesNoYesYesYesYesYes
PMR endogeneityNoNoNoYesNoYesNoNoNoYesNoYes
EPL endogeneityNoNoNoNoYesYesNoNoNoNoYesYes
Adjusted R20.830.880.430.450.500.480.870.900.450.480.520.51
Number of observations317317317281279277317317317281279277
Weak identification test–––63.52141.9133.44–––20.19137.3314.46
Overidentification test–––0.140.860.17–––0.350.880.45
Endogeneity test–––0.340.720.37–––0.520.470.29

Descriptive statistics

Number of observationsMeanStandard deviationMinimumMaximumAverage variation over the period
Unemployment rate
Total3847.94.21.827.5
By gender
Female3848.54.82.231.4
Male3847.54.21.325.6
By age (years)
15–2438417.99.64.358.3
25–493847.14.01.327.8
50–743735.53.20.820.3
By level of education
Low education37913.78.82.553.3
Middle education3767.94.71.431.2
High education3694.42.61.220.4
EPL
Total3442.60.51.64.1-0.06
Individual dismissals3442.40.71.04.6-0.08
Collective dismissals3443.20.71.65.1-0.03
Temporary employment3381.71.00.34.8-0.07
PMR
Total3541.80.40.93.2-0.29
State control3542.60.61.24.2-0.32
Public ownership3543.00.81.15.0-0.23
Price controls and command and3592.10.90.94.8-0.41
control
Barriers to entrepreneurship3542.20.51.13.4-0.36
Regulatory and administrative opacity3542.50.90.44.5-0.44
Administrative burdens on startups3592.40.71.14.1-0.29
Barriers to competition3541.60.60.63.0-0.36
Barriers to trade and investments3590.60.50.13.1-0.18
Barriers to FDI, tariffs, and discriminatory3590.30.30.01.6-0.09
procedures
Regulatory barriers3591.00.80.24.7-0.27
Control variables
Net replacement rate35239.714.710.974.0
Union density37535.122.26.599.1
GDP gap (%)3820.01.8-10.69.3
Inflation3762.82.3-1.716.3
Labor productivity growth3841.42.4-6.411.4

Instrumental variable estimations using different lagged values

Testing PMR endogeneityTesting EPL endogeneityTesting PMR and EPL endogeneity
Lag 1Lag 2Lag 3Lag 4Lag 5Lag 1Lag 2Lag 3Lag 4Lag 5Lag 1Lag 2Lag 3Lag 4Lag 5
Employment protection-6.74***-6.36***-6.35***-6.80***-7.53***-6.43***-5.96**-6.55**-7.26**-8.24**-7.13***-6.68**-7.25**-8.24**-9.47**
(1.90)(2.06)(2.18)(2.30)(2.46)(2.38)(2.57)(3.18)(3.43)(3.56)(2.61)(2.75)(3.31)(3.63)(3.73)
PMR414***3 97***4 25***4 28***4 25**3 14***3 29***3 50***3 10***2 68**4 25***3 89***4 24***417***444**
(1.12)(1.19)(1.33)(1.48)(1.73)(0.97)(1.01)(1.06)(1.15)(1.26)(1.17)(1.18)(1.33)(1.48)(1.80)
EstimatorIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FEIV-FE
Control variablesYesYesYesYesYesYesYesYesYesYesYesYesYesYesYes
PMR endogeneityYesYesYesYesYesNoNoNoNoNoYesYesYesYesYes
EPL endogeneityNoNoNoNoNoYesYesYesYesYesYesYesYesYesYes
Adjusted R20.390.390.390.400.410.410.440.440.450.460.410.450.440.460.47
Number of observations299281263242221298279260238216297277257234211
Weak identification test80.1327.2178.899.456.337.1137.392.056.240.642.669.044.426.116.6
Overidentification test-0.300.240.160.16-0.840.180.310.50-0.600.270.370.54
Endogeneity test0.200.190.170.220.340.990.950.310.450.660.330.420.810.960.94

Excluding PT, GR, ES, and IT as robustness check

(1)(2)(1')(2')(1'')(2'')(1''')(2''')
Employment protection-6.56*** (1.30)4.21*** (1.59)-6.16*** (1.23)3.35** (1.49)-6.21*** (1.24)2.76* (1.56)
1) Individual dismissals-8.52*** (1.22)-0.70 (1.48)
2) Collective dismissals1.62** (0.73)4.65*** (0.77)
3) Temporary employment-1.22*** (0.35)-0.51 (0.55)
PMR3.45*** (0.93)2.83*** (0.78)3.02*** (0.92)2.82*** (0.78)
1) State control-1.74*** (0.54)-1.54*** (0.46)
a) Public ownership-0.14(0.39)-0.08(0.32)
b) Price controls and C&C-2.20*** (0.46)-1.63*** (0.44)
2) Barriers to entrepreneurship3.91*** (0.72)3.21*** (0.64)
a) Regulatory and admin opacity1.43*** (0.29)1.29*** (0.24)
b) Administrative burdens on startups2.24*** (0.56)1.88*** (0.58)
c) Barriers to competition0.48 (0.57)-0.68 (0.56)
3) Barriers to trade and investment1.53*** (0.47)1.34*** (0.39)
a) Barriers to FDI1.89* (1.10)0.82 (0.92)
b) Regulatory barriers0.29 (0.38)0.71** (0.34)
EstimatorFEFEFEFEFEFEFEFE
Adjusted R20.350.280.410.330.430.380.450.42
Number of observations317254312249317254317254

Impact of PMR and EPL on unemployment rate for different types of workers using FE regressions

GenderAgeEducation
FemaleMale15-24(Y)25-49 (M)50-74 (0)LowMiddleHigh
Employment protection-7.02***-6.08***-12.80***-6.91***-6.09***-5.84***-6.33***-5.84***
(1.29)(1.37)(2.74)(1.24)(0.99)(1.81)(1.41)(0.73)
PMR3.76***3.26***4.42**3.19***2.54***5.05***3.50***1.32***
(0.92)(0.98)(1.96)(0.89)(0.71)(1.29)(1.00)(0.52)
EstimatorFEFEFEFEFEFEFEFE
Control variablesYesYesYesYesYesYesYesYes
Country fixed effectsYesYesYesYesYesYesYesYes
Year fixed effectsYesYesYesYesYesYesYesYes
Adjusted R20.300.400.390.380.410.440.370.44
Number of observations317317317317317314314314
|Coeff| EPL statistically differentF=MM=FY>M* andY>0**M<Y*and M=OO<Y**and O=ML=M and L=HM=L and M=HH=L and H=M
|Coeff| PMR statistically differentF=MM=FY=M and Y=OM=Y and M=OO=Y and O=ML=M and L>H***M=L and M>H*H<L***and H<M*

Impact of different types of EPL on the unemployment rate

(1)(2)(3)(4)(5)(6)
Employment protection
1) Individual dismissals-0.00-1.14***-8.52***-8.30***-10.09***-10.27***
(0.29)(0.28)(1.22)(1.72)(2.13)(2.25)
2) Collective dismissals1.31***0.201.62**1.77**3.10***3.08***
(0.28)(0.14)(0.73)(0.87)(1.03)(1.03)
3) Temporary employment0.48***0.47***-1.22***-1.49***-1.60***-1.54***
(0.17)(0.16)(0.35)(0.48)(0.59)(0.59)
PMR2.50***5.25***3.02***2.87***2.22**2.73**
(0.82)(0.63)(0.92)(1.11)(1.04)(1.18)
EstimatorOLSOLSFEIV-FEIV-FEIV-FE
Control variablesYesYesYesYesYesYes
Country fixed effectsNoNoYesYesYesYes
Year fixed effectsNoYesYesYesYesYes
PMR endogeneityNoNoNoYesNoYes
EPL endogeneityNoNoNoNoYesYes
Adjusted R20.840.880.410.470.500.50
Number of observations312312312278274274
Weak identification test–––282.1225.6624.57
Overidentification test–––0.270.460.43
Endogeneity test–––0.270.180.26
eISSN:
2193-9004
Language:
English
Publication timeframe:
Volume Open
Journal Subjects:
Business and Economics, Political Economics, Microeconomics, Macroecomics, Economic Policy, Mathematics and Statistics for Economists, Econometrics
Journal RSS Feed