Tight labor market regulation increases global unemployment (3/18/2009)

Findings, published in the Journal of Comparative Economics, studied by 73 countries by the University of Bath, proves that srict labor market regulation increases unemployment all over the world.

Based on data for the years 2000 to 2003, the findings suggest that if, for instance, Italy (a typical country with strict regulation) had enjoyed the same flexibility in labor market regulation as the United States (a typical country with flexible regulation), its unemployment rate might have been 2.3 percentage points lower among the total labor force (3.4 percentage points lower among women and 5.6 percentage points lower among young people).

The research was carried out by Dr Horst Feldmann, from the University’s Department of Economics & International Development. Dr. Feldman claims that “The adverse labor market effects are probably due to lower investment by domestic firms as well as lower foreign direct investment inflows caused by stricter labor market regulation.”

The study finds that strict hiring and firing rules are the area of labor market regulation which appears to have adverse effects on unemployment. While stringent hiring rules restrict temporary work agencies and the use of fixed-term contracts, tight firing rules make it difficult and costly for employers to lay off workers. These rules, as well as strict labor market regulation in general, have a particularly adverse impact on women and young people. Dr Feldmann said: “Women often take a career break to have children and later on try to get back into employment. Young people are just entering working life. Therefore, it is possible that both groups are more strongly affected when employers are reluctant to hire staff due to strict labour market regulation.”

According to the study, another type of labor market regulation that is probable to raise unemployment is military conscription. This was the first time when the effects of military conscription on the labor market had been analyzed. Dr Feldmann explained: “A main reason may be that conscripts leaving the armed forces after the end of their service have difficulties finding a job because they did not gather the skills and work experience that employers are looking for. The longer the conscription period, the more severe this mismatch is likely to be. According to my findings, this effect is the strongest among young people. This is obviously because conscripts typically are in this age group.“

Feldmann used indicators that measure the strictness of hiring and firing regulation and the use of conscription and also the indicators that measure the strictness of minimum wage laws, the centralization of wage bargaining and the generosity of unemployment benefits. The average of these five individual indicators is his aggregate indicator measuring the overall strictness of labor market regulation. On average over the years 2000-2003, Italy’s flexibility of labor market regulation was rated 3.6 out of 10 – while the United States was rated 7.2 and the United Kingdom was rated 6.8.

“The research suggests that the UK’s fairly flexible labor market regulation is likely to strengthen the economy’s resistance to undergo the current crisis. Although unemployment is going to increase sharply for some time, countries with more flexible regulation will probably experience a faster and more noticeable fall in unemployment once the crisis is overcome,” assumed Dr Feldmann.

I find these findings pretty interesting. It sounds logical that with really strict labour market regulations, people have more problems to find a job, especially women, young people and military conscripts, because they are “risky“ for the company – the company would have to pay the maternity leave, or additional education necessary for the position. Therefore it is a lot easier for women and young people to find a job in a labour market with more flexible and less strict regulations. On the other hand, it may depend on more factors than just market regulations. In my opinion, culture and customs in general influence the employement of women and young people also in a great measure.


One thought on “Tight labor market regulation increases global unemployment (3/18/2009)

  1. wow, that is interesting 🙂 This premise (stricter labour market, higher unemployment, etc) is advocated by liberal economics. I generally agree.
    HOWEVER, during writing my paper on flexicurity I have also mentioned the survey made in 2003 (Cazes and Nesporova) that tried to find coorelation with strictness of labour market and unemployment of central and east european countries. The coorelation was found but concluded that is statistically unimportat and so concluded has no effect un unemployment. They did the same thing with self-employment, temporary employment, laboru turnover etc. The same result.


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