Abstract
This paper deals with the effects of labour market institutions on unemployment in a panel of 19 OECD countries for the period 1960–2000. In contrast to many other studies, we use long time series and analyse cyclically adjusted trend values of the unemployment rate. Our novel contribution is the estimation of panel models where we allow for heterogeneous effects of institutions on unemployment. Our main results are, first, that on the average tighter employment protection, a higher tax burden on labour income and a more generous unemployment insurance system increase, whereas a higher centralization of wage negotiations decreases unemployment, and secondly, that the magnitude of the effects of institutions differs considerably between countries.
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Notes
For the period between 1985 and 2000, the correlation between the Allard indicator and the OECD indicator (Version 1) is 0.92. For Version 2 of the OECD indicator that in contrast to Version 1 is the weighted sum of the sub-indicators for regular and temporary contracts and collective dismissals the correlation amounts to 0.94. Version 2 is available only from 1998 onwards. The Labour Market Institutions Database of Nickell and Nunziata (2001) offers for the years from 1960 until 1995 another measure of the strictness of employment protection. This series was built chaining some OECD data with data from Lazear (1990) and has two drawbacks compared with the newer OECD or Allard data: Firstly, the authors often have to use the method of interpolation for many missing years. Secondly, the Lazear data is constructed on the basis of a less extensive collection of employment protection dimensions, compared with data used by the OECD. The correlation between the Nickell and Nunziata indicator and the OECD indicator (Version 1) for the years 1985 until 1995 is 0.82.
We call the heterogeneity not individual effects, but country effects in our article.
In the literature the name mixed models is often used for more elaborate random effects models as for example random coefficients models or multilevel linear models (Cameron and Trivedi 2005). Here we deviate from the literature and use for model 4 this name to express that this specification permits random as well as fixed effects.
We show here only the fixed effects estimates, because there are no relevant differences, like with the longer panel, between random effect and fixed effect estimation.
Again, we present only the fixed effects estimates, because there are no relevant differences between random effect and fixed effect estimation with cluster robust standard errors.
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Acknowledgments
The research in this paper is part of the project “Zukunft der Arbeit”, sponsored by funds of the “Pact for Research and Innovation”. The financial support is gratefully acknowledged. We thank participants at seminars at the Universität der Bundeswehr (Hamburg), Universität Osnabrück, Institut für Zeitgeschichte, ifo Institut and the congress of the Verein für Socialpolitk for useful comments. Two referees provided very helpful suggestions for improving an earlier version of the paper.
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Flaig, G., Rottmann, H. Labour market institutions and unemployment: an international panel data analysis. Empirica 40, 635–654 (2013). https://doi.org/10.1007/s10663-012-9208-5
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DOI: https://doi.org/10.1007/s10663-012-9208-5