Institutional interactions

Complementarity between pairs of institutions. Labor market institutions never operate in isolation. Their effects on labor outcomes interact with those of other institutions. 110 potential interactions. We will focus on the most relevant.

Why are these interactions important? Positive standpoint: take into account of all the potential interactions of an institution with other institutional features of the labor market. Normative standpoint: efficiency enhancing institutional reforms can find political support only when they are engineered in such a way as to exploit these institutional interactions.

Flexicurity Lisbon strategy (2000): “need to improve the adaptability of workers and enterprises.” Integrated Guidelines (2002): “Member States are asked to promote flexibility combined with employment security (…).” 2006 Spring European Council: “need to develop comprehensive policy strategies …. reforming labour market and social policies under an integrated flexicurity approach.” 2007 Recommendations of the Flexicurity Group European Parliament deliberations with the agreement of social partners. Support of the ETUC. Flexicurity is politically correct.

Unemployment Benefits and Employment Protection UB and EPL: protect workers against uninsurable labor market risk. Three key differences: EPL protects only those who already have a job, UB protects the population in working age at large. EPL does not impose any tax burden on workers, UBs are financed via a payroll tax levied on those who have a job. EPL: the employer who has to offer replacement income to the workers laid-off; UBs: are a risk sharing device.

Unemployment Benefits and Employment Protection These three key differences can be reduced by adjustments in the design of UBs or EPL. However some differences between UBs and EPL are unavoidable and they are perceived by unemployed. Unemployed individuals are likely to always rank UBs over EPL. Employees would instead rank EPL over UBs (discount rate). Due to this imperfect substitutability between UBs and EPL, we are unlikely to observe countries with only EPL or only UBs.

Unemployment Benefits and Employment Protection

UBs and Active Policies UBs can act as disincentives to job search, ALMPs reduce moral hazard associated with the provision of UBs. Positive cross-sectional correlation between the generosity of UBs and the investment made by individual countries in policies and infrastructures (e.g., a public employment service) encouraging unemployment benefit recipients to go back to work.

UBs and Active Policies

EPL and Unions A stronger influence of unions in wage setting is likely to reduce both downward wage adjustment and wage differentials across workers in the same firm, industry or country. Limiting the freedom of employers in setting wages induces them to react to shocks by adjusting employment levels. In response to the labor demand shocks that EPL are meant to protect workers from, wages could fall so as to make stable employment profitable, or to induce voluntary quits.

EPL and Unions

Taxes and UBs Positive correlation between UBs and taxes: The effects of labor taxes on employment depends on the use which is made of the tax revenues; if perceived as a form of insurance or deferred consumption. Taxes have less effects on employment when they are progressive. Progressive taxation indeed, by reducing labor taxes at low earning levels, reduces the adverse effects of taxes on labor supply and unemployment. Hence more UBs can better coexist with high labor taxes.

Taxes and UBs

Taxes and unions If labor supply is rigid, taxes are paid by workers in terms of a reduction in net wages, labor costs for firms are unaffected: there is no effect on employment. Unions impose a markup over the reservation wage of individuals, inducing an upward shift of the labor supply faced by employers.

Taxes and unions In presence of unions, labor taxes are bound to affect not only employment, but also unemployment as wages are set above the reservation wage of individuals. If unions are internally well coordinated ( national wage setting), then the adverse effects of taxes on employment are "internalized" in wage setting, inducing unions to reduce wage claims in presence of labor taxes

Taxes and unions Labor taxes are compatible with low unemployment and wage moderation in widely different circumstances: when unions are weak as in the United Kingdom since the 1980s in the presence of extensive consultation between unions, government and employers. Labor taxes should have less adverse effects on unemployment when coupled with centralized collective bargaining institutions

Taxes and unions

Education and retirement programmes Both education and retirement programmes operate intergenerational redistributions albeit typically in opposite directions. The degree of representation of the different generations in the political process is therefore bound to affect the size and design of these two institutions. In general, ageing societies should experience a shift in the policy mix in favor of more generous retirement institutions.

Education and retirement programmes However the two institutions could only jointly improve the efficiency of intergenerational transfers, making retirement schemes and education programmes supporting each other. Young people borrow from the middle age people in order to invest in their human capital and pay back their debt to the previous generation in terms of social security contributions.

Education and retirement programmes

Summarising Institutional interactions is a fascinating research agenda. For instance, we found labor taxes to be positively correlated not only with unions, but also with UBs. This suggests that also unions and UBs are positively correlated and we can possibly find theoretical explanations for a correlation between unions and UBs as well.