External labour market flexibility: boosting productivity?

Based on a joint research with Alfred Kleinknecht (TU Delft)

Robert VergeerTel: +31 (0)88 86 62 995Email: robert.vergeer@tno.nl

Varieties of capitalism (Hall & Soskice)

'Liberal Market Economies' (LME) - 'Coordinated Market Economies' (CME)

LME countries:

• USA• Canada• Australia• Ireland• Great Britain• New Zealand

CME ('Rhineland'):

• Most continental European countries

• Japan

Properties of LME versus CME'Liberal Market Economies' (LME) - 'Coordinated Market Economies' (CME)

LME (Anglo-Saxon):

•Easy hiring and firing•Shorter stay in same firm•Modest unemployment benefits•Weak trade unions•Labor relations are more 'conflictuous'•Wage bargaining more de-centralized: income distribution more unequal

CME (Rhineland):

• Protection against firing• Longer stay in same firm• Generous unemployment

benefits• Strong trade unions• Labor relations are more 'co-

operative'• Wage bargaining more

centralized: more income equality

Study Effect (EPL +1 -> prod …)

Nickell and Layard (1999) +0.09

Buchele and Christiansen (1999) +0.45

Scarpetta and Tressel (2004) NS; negative only if combined with intermediate level of coordination for wage bargaining

Storm and Naastepad (2007) +0.2

Autor, Kerr and Kugler (2007) Positive

OECD (2007) -0.02

Dew-Becker and Gorden (2007) +1.2 (∆ EPL)

Lucidi and Kleinknecht (2009) Positive

Does labour market flexibility promote productivity growth?

Evidence from recent literature …

Development of wages: Anglo-Saxon VS Continental European countries

Real wage (1960=100)

100

200

300

400

1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Cont.-European Anglo-Saxon

Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).

Development of the wage share, 1960s-2000s (20 OECD countries)

Wage share

46%

48%

50%

52%

54%

56%

58%

60%

1963 1968 1973 1978 1983 1988 1993 1998 2003

Data: GGDC

Does labour market flexibility promote productivity growth?Arguments in favour of flexible labour markets

Difficult and expensive firing of redundant personnel frustrates labour-saving process innovationsWith easier firing, shifting labour from old and declining industries to innovative activities is easierEasier firing enhances the inflow of 'fresh blood' (i.e. of people with novel ideas and networks)The (latent) threat of easy firing reduces shirking.

Does labour market flexibility promote productivity growth?Arguments against flexible labour markets

Effects on firms’ innovative activity; Effects on workforce training; Effects on trust and loyalty.

Does labour market flexibility promote productivity growth?Arguments against flexible labour markets

Effects on workforce training

Less investment in manpower training as pay-back periods become shorter;

Personnel have fewer incentives to invest in firm-specific knowledge;

Unions and employer-associations have less possibilities to set-up shared

training facilities.

Does labour market flexibility promote productivity growth?Arguments against flexible labour markets

Effects on Trust and loyaltyGreater chances that trade secrets and technological knowledge will leak to

competitors, larger positive externalities leading to stronger under-investment

in knowledge;Easy firing of personnel will change power relations in firms. People will less

easily criticize (top) management decisions. Lack of critical feedback from the shop floor can favour problematic management practices;

People on the shop floor possess much of the (tacit) knowledge required for

process innovations. People threatened by easy firing have incentives not to

reveal knowledge relevant to labour-saving process innovations;

There is more need for monitoring and control. Anglo-Saxon countries have

substantially larger management bureaucracies which are frustrating for

creative people (Kleinknecht et al. 2006).

Shares of managers in working population (19 OECD countries, 1984-1997)

Does labour market flexibility promote productivity growth?Arguments against flexible labour markets

Does labour market flexibility promote productivity growth?Arguments against flexible labour markets

Effects on firms’ innovative activityA larger personnel turnover weakens the 'historical memory' of organizations and

the 'learning organization'.

Continuous accumulation of (tacit) knowledge for incremental innovation in a

Schumpeter II 'routinized' innovation regime requires a certain rigidity in labour

relations;

Creative destruction becomes more effective, as firms cannot flee to laying off

people or lowering wages when they are competed out by more innovative

firms;

Effects through (lower) wages;- Capital/labour substitution;- Induced innovation;- Vintage effect;- Creative destruction;- Demand pool/Verdoorn effects.

Development of wages: Anglo-Saxon VS Continental European countries

Real wage (1960=100)

100

200

300

400

1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Cont.-European Anglo-Saxon

Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).

Development of hours worked: Anglo-Saxon VS Continental European countries

Total hours worked (1960=100)

100

120

140

160

180

200

1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Cont.-European Anglo-Saxon

Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).

Development of GDP: Anglo-Saxon VS Continental European countries

Real GDP (1960=100)

100

200

300

400

1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Cont.-European Anglo-Saxon

Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).

Development of labour productivity: Anglo-Saxon VS Continental European countries

labour productivity (1960=100)

100

200

300

400

1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Cont.-European Anglo-Saxon

Anglo-Saxon countries: Australia, Canada, New Zealand, UK and USA;Cont.-European countries: Austria, Belgium, Denmark, Finland, France, Germany, Italy,Netherlands, Portugal, Spain, Sweden;Source: Database of the Groningen Growth and Development Centre (http://www.ggdc.net/).

Emperical strategy

Hypothesis: higher wage(share) causes higher productivity growth

Data for 20 OECD countries1960s – 2000sTaken from GGDC total economy databaseApproximately 800 observations

Emperical strategy

Take into accountVerdoornUnobserved country and time effectsShare of servicesLagged productivityEmployment growth

Emperical strategy

Control for reversed causation -> Instruments (Arellano Bond-procedure)Control for short term effects -> 5 year averagesControl for arbitrariness in choosing begin/end of time-span: roll-over central-year of averages (i.e. we run every regression 5 times and calculate average statistics)# observations: approximately 110

Reported P-values and significance

P_1,5,10 counts how many of the 5 rolling regressions yield a coefficient with the respective significance level;

Significance based on: average z / average pBecause transformation from z to p is not linear

10-04-23Titel van de presentatie

22

(Z1,p1)=(-3;0.02)

(Z2,p2)=(-1;0.32)

10-04-23Titel van de presentatie

23

(Z1,p1)=(-3;0.02)

(Z2,p2)=(-1;0.32)

Z_average = -2 -> implied p = 0.05p_average = 0.17

10-04-23Titel van de presentatie

24

(Z1,p1)=(-3;0.02)

(Z2,p2)=(-1;0.32)

Z_average = -2 -> implied p = 0.05p_average = 0.17

Z_average -> overconfidentp_average -> underconfident

Results of Arellano-Bond regressions explaining the growth of labour productivity, on 5-year averaged values for 20 OECD countries from the 1960s to the 2000s Independents (I) (II) (III) (IV) (V) (VI)

w 0 . 46**/** 0 . 35*/** 0 . 44**/** 0 . 45**/** 0 . 41**/** 0 . 41/** P_1,5,10 1,4,5 1,2,4 1,4,5 2,3,4 0,3,5 1,2,3

ws 0 . 24***/*** 0 . 17**/** 0 . 23***/*** 0 . 23***/*** 0 . 22***/*** 0 . 21**/** P_1,5,10 4,5,5 2,3,4 2,5,5 4,5,5 4,5,5 3,4,5

Catchup -0 . 05*/** -0 . 06***/*** -0 . 06**/** -0 . 07*/** -0 . 05*/** -0 . 06**/*** P_1,5,10 1,2,3 4,5,5 1,3,4 2,2,3 1,3,4 2.4.4

Verdoorn ( Y ) 0 . 16/ 0 . 08/ 0 . 09/ 0 . 21/ P_1,5,10 0,0,0 0,0,0 0,0,0 0,0,0

1ˆ (a) -0 . 11/

(1 . 37) P_1,5,10 0,1,1

l -0 . 94/ P_1,5,10 0,0,0

Services -0 . 03/ P_1,5,10 0,0,0

Germany -0 . 02/** P_1,5,10 2,3,3

Sargan P =0.48 ; zP =0.45 P =0.55 ; zP =0.51 P =0.47 ; zP =0.45 P =0.68 ; zP =0.68 P =0.55 ; zP =0.54 P =0.54 ; zP =0.53

P_1,5,10 0,0,0 0,0,1 0,0,0 0,0,0 0,0,0 0,0,0 Hansen P =0.45 ; zP =0.45 P =0.82 ; zP =0.83 P =0.46 ; zP =0.46 P =0.54 ; zP =0.54 P =0.42 ; zP =0.42 zP =0.59 ; zP =0.61

P_1,5,10 0,0,0 0,0,0 0,0,0 0,0,0 0,0,0 0,0,0 Ar2 P =0.48 ; zP =0.46 P =0.60 ; zP =0.42 P =0.32 ; zP =0.28 P =0.46 ; zP =0.42 P =0.43 ; zP =0.41 P =0.39

; zP =0.36 P_1,5,10 0,0,0 0,0,0 0,0,1 0,0,0 0,0,0 0,0,0

Conclusions

A return of the wage share from the value of the 2000s (51%) to the value in the 1970s (57%) would cause a rise in productivity growth of 1.5%;

This is caused by both direct effects from higher wages as well as by indirect effects because flexible labour market undermine organisational innovative capacity.

External labour market flexibility: boosting productivity?

Robert VergeerTel: +31 (0)88 86 62 995Email: robert.vergeer@tno.nl