Reforming Labor and Product Markets: Some Lessons from Two Decades of Experiments in Europe
IMF Working Papers, May 1, 2005
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- Reforming Labor and Product Markets: Some Lessons from Two Decades of Experiments in Europe
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Bibliographic details
- Authors: Tito Boeri
- Published: May 1, 2005
- Series: IMF Working Papers
Summary of the paper
- Evaluates European structural reforms over the last 20 years in light of economic theory predictions about interactions between labor and product market reforms.
- Finds that reforms in labor markets occur at higher frequencies than reforms in product markets, while product market reforms are more coherent.
- Attributes these asymmetries to the nature of political obstacles in the two domains.
Major findings
- Labor market reforms exploit institutional trade-offs:
- Reforms can trade labor market flexibility with state-provided unemployment insurance.
- Reforms can be applied only to new entrants in the market without affecting regulations for existing workers (two-tier strategies).
- Two-tier strategies are infeasible in product markets because incumbent firms can easily drive away new entrants.
- In product markets, it is possible to shift responsibilities to supranational authorities to resist pressures from national lobbies, enabling more coherent reform efforts.
Political-economy mechanisms emphasized
- Frequency vs. coherence trade-off:
- Labor market: higher frequency, less coherence due to ability to target new entrants and to offer compensating insurance.
- Product market: lower frequency, greater coherence due to incumbent barriers and the alternative channel of supranational delegation.
- Role of incumbency and entry:
- Incumbent firms in product markets can deter entry, preventing two-tier reform strategies that are feasible in labor markets.
Policy implications and takeaways
- Designing labor market reforms should account for available institutional trade-offs (flexibility versus unemployment insurance) and the political feasibility of targeting new entrants.
- Product market reform strategies may benefit from supranational institutional design to overcome national lobbying and incumbent resistance.
- Policymakers should recognize that instruments and political constraints differ systematically across labor and product markets; reform sequencing and institutional design should reflect these differences.
Source: Reforming Labor and Product Markets: Some Lessons from Two Decades of Experiments in Europe — Tito Boeri, May 1, 2005.