Berlin, 30 November 2016

Enhancing Economic Flexibility:What Is in It for Workers?

www.oecd.org/eco/enhancing-economic-flexibility-what-is-in-it-for-workers.htm

ECOSCOPE blog: oecdecoscope.wordpress.com

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Key messages

Enhancing economic flexibility has different effects on different people

• Overall, reforms that make product markets more competitive enhance job-finding chances• This benefit is concentrated among women and younger workers• Low-income and low-skilled workers experience higher labour-market turnover as a result of

such reforms• Regulatory reform reduces relative wage premia for workers in the sectors that undergo reform

The policy framework shapes the effects of flexibility-enhancing policies on workers• Product market reforms generate higher job-finding benefits and lower job-loss costs where

labour-market policy settings are more flexible• Activation programmes enhance the job-finding benefits of employment protection reforms

Broad reform strategies across sectors and policy areas including active support for vulnerable workers serve inclusive growth best

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Structure

1. Motivation and approach

2. Effects across all workers

3. Influence of other policies

4. Effects on workers in reformed sectors

5. Policy implications

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1. MOTIVATION AND APPROACH

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Motivation: How to make pro-growth reforms more inclusive?

Key issue: many people gain, but some may lose a lot, at least temporarily• Loss aversion magnifies perceived costs relative to gains• Those who lose from a reform are more likely to organise against it than those who gain

Scope: reforms that make labour or product market rules more flexible• Reforms that reduce employment protection legislation for workers with regular (EPL-R)

contracts or (EPL-T) temporary • Reforms that instil greater competition in:

• Energy, transport and communications regulation (ETCR)• Product market regulation (PMR)

Question: what are the effects of greater economic flexibility on workers?• The results document reform effects on the

• Risk of becoming jobless (unemployed or moving out of the labour force)• Chances of finding a job when unemployed• Wages of workers in reformed industries relative to other industries

Conclusion: policy packages can deliver more inclusive benefits

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Approach: micro analysis can show what flexibility policies mean for individuals

Micro-level data• Six national surveys (AUS, DEU, KOR, CHE, GBR, USA)• European Community Household Panel (ECHP)• EU Survey of Income and Living Conditions (EU-SILC)• EU Labour Force Surveys• EU Structure of Earnings Survey

Micro-level regressions• Effects on workers in all sectors: micro-panel regressions on 26 countries

with individual controls, country policy indicators and interactions over 1994-2012

• Effects on workers in reformed sectors: micro-level regressions including sector regulation indicators and individual controls using three multi-country datasets

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2. EFFECTS ON WORKERS IN ALL SECTORS

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Reforms enhancing product market competition boost workers’ job-finding chances

Source: Cournède, Denk and Garda (2016).

Note: A typical reform is defined as the average 5-year policy change over reform episodes in the OECD indicators of employment protection legislation for regular (EPL-R) or temporary (EPL-T) contracts , product market regulation (PMR) or energy, transport and communication regulation (ETCR).

EPL-regular EPL-temporary PMR ETCR0

5

10

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35Country average After a typical reformPer cent

Job protection Product market competition

Average transition probabilities into employment among jobless working-age persons

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Flexibility-enhancing reforms have no systematic effects on job-loss risk …

EPL-regular EPL-temporary PMR ETCR0

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12Country average After a typical reform

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Source: Cournède, Denk and Garda (2016).

Note: A typical reform is defined as the average 5-year policy change over reform episodes in the OECD indicators of employment protection legislation for regular (EPL-R) or temporary (EPL-T) contracts , product market regulation (PMR) or energy, transport and communication regulation (ETCR).

Per cent

Job protection Product market competition

Average transition probabilities out of employment

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…but product market reforms imply more frequent transitions out of a job for low-income workers

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Source: Cournède, Denk and Garda (2016).

Note: A typical reform is defined as the average 5-year policy change over reform episodes in the OECD indicator of regulation in product markets (PMR, left panel) or energy, transport and communication (ETCR, right panel). Hatched areas indicate negative effects.

Average transition probabilities out of employment, percentages

Bottom quartile

Second quartile

Third quartile

Top quartile

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Bottom quartile

Second quartile

Third quartile

Top quartile

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30Energy, transport and communication regulationOverall product market regulation

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Product market reforms generally boost women’s job-finding chances but not men’s

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Source: Cournède, Denk and Garda (2016).

Average transition probabilities into employment, percentages

Overall product market regulation

Men Women0

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Men Women0

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Energy, transport and communication regulation

Note: A typical reform is defined as the average 5-year policy change over reform episodes in the OECD indicator of regulation in product markets (PMR, left panel) or energy, transport and communication (ETCR, right panel). Hatched areas indicate negative effects.

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Product market reforms increase job- finding chances mostly for the young

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Source: Cournède, Denk and Garda (2016).

Note: A typical reform is defined as the average 5-year policy change (measured by the OECD product market regulation PMR indicator) over reform episodes.

Estimated percentage point change in job-finding probabilities after a typical product market reform

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Age

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3. INFLUENCE OF OTHER POLICIES

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Easing job protection boosts hiring in countries with strong activation policies

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Source: Cournède, Denk and Garda (2016).

Note: A typical reform is defined as the average 5-year policy change (measured by the indicator of employment protection legislation for regular contracts EPL-R) over reform episodes. ALMP stands for active labour market policies.

Estimated percentage point change in job-finding probabilities among jobless working-age people after a typical reform of job protection for regular contracts

0.2 0.4 0.5 0.7 0.8 1.0 1.2 1.3 1.5 1.6 1.8 1.9 2.1 2.3 2.4 2.6 2.7 2.9 3.1-2

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Ratio of ALMP spending to cross-country 2012 average

DNK(2012)

EST (2012)

SWE (2012)

HUN (2012)

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Easing job protection raises job-loss risk in countries with medium-level wage coordination

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Source: Cournède, Denk and Garda (2016).

Percentage points

Estimated changes in transition probabilities out of employment after a typical reform of job protection for regular contracts

Low coordination Medium coordination High coordination-2

-1

0

1

2

Note: A typical reform is defined as the average 5-year policy change (measured by the indicator of employment protection legislation for regular contracts EPL-R) over reform episodes.

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Pro-competition reforms typically reduce job-loss risk where job protection is flexible

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Source: Cournède, Denk and Garda (2016).

Note: A typical reform is defined as the average 5-year policy change (measured by the energy, transport and communication regulation ETCR indicator) over reform episodes.

1.000

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EPL-R

Percentage points

GBR (2013)

PRT (2013) PRT (1994)

Estimated changes in transition probabilities out of employment after a typical regulatory reform of network industries

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4. EFFECTS ON WORKERS IN REFORMED INDUSTRIES

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Network industry reform has reduced estimated wage premia in these sectors

Source: Denk (2016).

Note: This chart shows the average tightness of network industry regulation in 21 OECD countries and the associated estimated wage premium for workers in this industry.

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20Wage premium for network industry workersNetwork industry regulation index

Per cent

Highlyregulated

Lightlyregulated

Index points

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Network industry reform has been accompanied by higher worker exit and entry

Source: Denk (2016).

Note: This figure shows the average annual rates of exit and entry out of and into work in network sectors, from and to unemployment or economic inactivity (blue bars), the effect of a typical reform (green rectangles) and confidence intervals (black segments). A typical network industry reform is defined as the mean five-year change in the indicator across countries where it declined.

Exit rate from network industries Entry rate into network industries0

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25After a typical reform Country average

Annual rates of exit and entry out of and into work in network sectorsPer cent

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5. POLICY PACKAGES FOR INCLUSIVE REFORMS

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Reform broadly rather than narrowly

Recognise that narrow reforms can imply lower relative wages in reformed sectors

Narrow reform coupled with direct compensation risks being short-sighted• Yes, there are instances where direct compensation facilitated policy changes• But this tactic• Raises issues of fairness for workers employed in already competitive sectors who find themselves

funding former beneficiaries of the rents that anti-competitive regulation generated• Risks compromising future reform, because the anticipation of compensation produces the wrong

incentives in still unreformed sectors

Broad reform is fairer and more economically efficient• Across-the-board reform of regulated sectors• Ensures that workers experiencing reductions of their wage premia gain purchasing power from the

price reductions that reform generates in other sectors: it is fairer• Avoids the need to fund compensation and the associated distortions: it is more efficient

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Design strategies that enhance job gains, limit job losses and help the most vulnerable

Reform is more inclusive when co-ordinated rather than piecemeal• Product market reforms deliver larger job-finding gains while generating smaller

increases in job-loss risks where labour market settings are more flexible.

Active labour market policies facilitate inclusive reform

• Reforms of employment protection typically enhance jobless people’s chances of finding jobs more in countries that invest more in active labour market policies

• The quality of activation programmes matters• The uneven effects of reforms underline the importance of ensuring that active

labour market policies effectively help workers who are less qualified or have low income

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An illustration: activation policies can enhance the benefits of labour-market reform

23Source: Cournède, Denk, Garda and Hoeller (2016).

Note: A typical reform of employment protection legislation for regular contracts (EPL-R) reduces the EPL-R indicator by 0.30. Spending on active labour market programmes (ALMP) per person unemployed takes its highest 2012 value, relative to GDP per capita, in Denmark.

0

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70Transition probability jobless-employed 2005-12Typical EPL reform with ALMP at current settingsTypical EPL reform with highest observed ALMP

Per cent

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Underlying data and analysis:

Cournède, B., O. Denk, P. Garda and P. Hoeller (2016): “Enhancing Economic Flexibility: What is in it for Workers?”, OECD Economic Policy Papers, No. 19, OECD Publishing.Cournède, B., O. Denk and P. Garda (2016), “Effects of Flexibility-Enhancing Reforms on Employment Transitions”, OECD Economics Department Working Papers, No. 1348, OECD Publishing.Denk, O. (2016), “How Do Product Market Regulations Affect Workers? Evidence from the Network Industries”, OECD Economics Department Working Papers, No. 1349, OECD Publishing.Garda, P. (2016), “The Ins and Outs of Employment in 25 OECD Countries”, OECD Economics Department Working Papers, No. 1350, OECD Publishing.

Disclaimers:

This document should not be reported as representing the official views of the OECD or its member countries. The opinions expressed and arguments employed are those of the authors listed on this page.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

Latvia was not an OECD member at the time of preparation of this publication. Accordingly, Latvia does not appear in the list of OECD members and is not included in any OECD aggregates.