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«Der Open-Access-Publikationsserver der ZBW – Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW – Leibniz ...»

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Studies like Planas et al. (2007) or Daveri and Tabellini (2000) find a negative labor market impact of labor taxes, but they use a measure which only takes labor taxes and social security contributions into account. Nickell et al. (2005) for a dynamic specification or Baccaro and Rei (2007) for a static model report insignificant tax coefficients. However, both studies include the consumption tax in the tax measure calculations. On the micro-level, Bennmarker et al. (2009) report positive employment effects caused by reduced payroll taxes. Assuming a positive impact of higher consumption taxes on the labor market, the insignificant result could be the consequence of two effects in opposite directions, a negative payroll and a positive consumption tax effect.

The insignificant impact of income taxation seems to support the assumption that the workers’ bargaining power is not strong enough to shift the burden of an income tax increase on the firms. The positive consumption tax coefficient is, at least at first glance, difficult to explain since it is hard to imagine why higher taxes should lead to less unemployment. Possibly, the consumption tax rate has not direct effect on the unemployment rate, but works indirectly on the labor market through a variable which is omitted in the estimation. One candidate is the spending on active labor market policies, financed by the governmental tax revenues. These policies are usually assumed to support the unemployed to find a job, be it by training, further education or additional qualification.

Indeed, the consumption tax and the almp spending are highly positively correlated. In contrast, there is no positive relationship between almp and the remaining tax measures.11 Hence, I assume that including an adequate and comprehensive indicator for governmental training and qualification expenditures would at least dampen the positive consumption tax effect.12 While five indicators for different aspects of the bargaining system and power have been analyzed, only one of them turns out to be robustly related to the unemployment rate.

More specifically, the higher the bargaining coordination the better the labor market performance. The bargaining centralization, the union density, as well as the union coverage do not seem to be of importance. This is in line with the results summarized in Aidt and Tzannatos (2008). Nickell et al. (2005) also find a negative relationship between bargaining coordination and unemployment. However, they also report significant union density coefficients, what might be caused by the use of a less exact indicator.

The high correlation between the indicators for bargaining coordination and bargaining centralization of 0.62 indicates, that the impact of the centralization measure is at least partially captured by the coordination indicator. Furthermore, similar to most empirical studies, I do not find a robust empirical evidence for a humped-shaped relationship between bargaining coordination or centralization and the unemployment rate, an idea originally proposed by Calmfors and Driffill (1988). Depending on the number of included variables, I get inclusion probabilities slightly above or considerably below the prior inclusion probabilities for bargaining coordination.

Similarly, minimum wages do not contribute to the evolution of the unemployment rate.

The positive and negative effects of minimum wages seem to cancel each other out. The result confirms the findings of Addison et al. (2009) (also see the references therein) on the micro-level, or Bassanini and Duval (2006) in a cross-country framework. Both studies report no significant impact of minimum wages on labor market performance.

Theoretically, the influence of high employment protection is ambiguous since both the flows into and the flows out of employment are lowered, and it is unclear, which one I did not include an almp measure in the estimations since it is not comprehensively available.

However, I use a measure for governmental public spending in the estimations. The results concerning consumption taxes remain unchanged, probably due to the fact that public spending does not reliably capture the spending in training measures.

It is sometimes argued that consumption taxes are less distortionary and performance-increasing, compared to income or payroll taxes. Tax systems which are mainly based on consumption taxes should therefore be less distortionary, with positive effects on the macroeconomic performance. However, the data does not reveal any systematic relationship between the different tax measures and the unemployment rate. Countries with higher consumption taxes do not generally have lower income and payroll taxes.

prevails. The empirical literature does not agree on the labor market effects of employment protection legislation. While studies like Elmeskov et al. (1998) find an unemployment-enhancing impact, Baker et al. (2005) report the contrary. Additionally, Baccaro and Rei (2007) do not find any significant effect. The indicator for the degree of employment protection is highly robust. My findings indicate that a stronger protection leads to lower unemployment. However, the indicator I use shows only few time-variation. For some countries there is even no change over the whole period. While the results indicate the relevance of employment protection at least in terms of the crosscountry dimension, the indicator might not to be able to fully capture all dimensions of firing restrictions inside a country. This abates the reliability of the results.

The empirical literature on the unemployment benefit system is ambiguous. The microevidence suggests that rising unemployment benefits has probably negative but rather small effects on the unemployment rate. Lalive (2007) and van Ours and Vodopivec (2008) find at most a small impact on the unemployment rate of a cut in the duration of benefit payments. Furthermore, Røed and Zahng (2003) state that an increase in the unemployment compensation in Norway reduces the escape rate from unemployment.

Nickell et al. (2005) or the OECD (2006) find a clearly negative effect of benefit levels and, to a smaller extent, of benefit duration on the labor market, while Baker et al. (2005) report the contrary. Apart from the fact that unemployment benefit payments are fairly heterogeneous across countries and time I find that high benefits paid during the first year of unemployment increase the unemployment rate. This is largely in line with the impact reported in the literature. More interestingly, high benefits for long-term unemployed seem to lower the unemployment rate. This confirms the findings of Tatsiramos (2009) who mentions the improved matching quality and the positive impact on the next post-unemployment job.

The findings concerning the impact on unemployment of product market regulation point to a positive effect of public ownership and a negative effect of barriers to entry. Griffith et al. (2007) estimated that an increase in competition lowers employment, but used a less comprehensive data set compared to the one I constructed. Fiori et al.

(2007), using the same indicators as I did, report insignificant public ownership and negative entry barriers coefficients. However, they focus mainly on product and labor market interactions and did not pay much attention to the single product market measures. Another study using the same data is the one by Nicoletti and Scarpetta (2005).

They include an overall indicator for product market regulation, the overall indicator less public ownership, and the public ownership. All three indicators are negatively related to the labor market performance. Furthermore, Bertrand and Kramarz (2002) show for the French retail industry that entry barriers lower employment growth. Hence, my results with respect to the overall indicator and public ownership confirm previous findings, while the finding concerning the barriers to entry tell a different story compared to the existing literature.13

5 Conclusions

The aim of this paper is to assess which institutional indicators are related to the equilibrium unemployment rate for a panel of 17 countries over the last two decades. The results show that a number of institutional indicators are robustly linked to the evolution of the unemployment rate. More specifically, robust factors are the employment protection legislation, the public ownership and the barriers to entry, the payroll tax and the consumption tax rate, the bargaining coordination, as well as the unemployment benefits for the first year, and the fourth and fifth year of unemployment. Except of the unemployment benefits for which the impact on the unemployment rates does not seem to be homogeneous across countries, the results are insensitive to several changes of the estimation setup.

I find that institutional categories cannot be characterized by one specific indicator, since for some categories countervailing effects are at work. For example, while the first year unemployment benefits lower are negatively related to the unemployment rate, high benets for long-term unemployed are linked to low unemployment rates. Overall, 5 indicators positively affect the labor market performance. An increase in the employment protection, entry barriers, bargaining coordination, consumption tax, and the benefits for long-term unemployed seem to reduce the unemployment rate. Raising the first year benefits, the payroll tax as well as the public ownership negatively influences the unemployment rate.

This emphasizes the importance of considering the right indicators when dealing with the empirical assessment of institutions.

One crucial problem of empirical cross-country studies so far has been the difficulty of specifying the empirical model correctly, mainly due to the large number of possibly important indicators. My findings can pave the way to a more sophisticated empirical assessment of the impact of institutions on the labor market by providing a traceable and reasonable number of institutional indicators. Problems like the design and implementation of institutional reforms, the identification of institutional interactions or even of Note that Fiori et al. (2007) as well as Bertrand and Kramarz (2002) use employment as the dependent variable. Hence, the impact of regulation on employment and unemployment might not be directly comparable.

regulatory frameworks can be tackled with my results in mind.

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6.1 Literature Overview on Institutions and Unemployment Table 3 summarizes most of the cross-country studies prepared over the last 15 years, dealing with the identification of how institutions affect the labor market. I prepared this table in the style of Howell et al. (2007). A positive impact through an increase in an institution on the labor market (for instance, a lower unemployment rate) is indicated by pos, the contrary is displayed by neg, and an insignificant effect is insig. Since most of the studies estimate several specifications, there might be a positive, negative and insignificant effect for one institutional indicator in one study.

Table 5: Summary for the effects on unemployment of changes in institutions

–  –  –

Amable et al. 2007 pos/insig neg/insig — neg/insig — pos/insig — insig The abbreviations have been taken from the literature. EPL=Employment Protection Legislation, RR Level=Amount Replacement Rates, RR Dur=Duration Replacement Rates, UD=Union Density, UC=Union Coverage, BCO=Bargaining Coordination, BCE=Bargaining Centralization, Taxes=Labor Taxes.

6.2 Data Sources and Construction

All variables are on an annual basis and have been gathered for the period from 1982 to 2005. Note, that the data set is balanced. The countries included in the analysis are Australia, Austria, Belgium, Canada, Denmark Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States. For countries like Ireland, Portugal, New Zealand or Korea some data is missing which is why I had to exclude them.

6.2.1 Unemployment Rate

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