EMPLOYMENT FLEXIBILITY AND UK REGIONAL UNEMPLOYMENT Vassilis MONASTIRIOTIS European Institute, LSE Labour Market Flexibility Research Seminar, London, 15 December 2004

Labour Market Flexibility Research Seminar, 15 December 2004 Overview of presentation Introductory notes What is labour market flexibility? –theory and measurement Literature review –institutions, unemployment, and flexibility Research questions –unemployment, persistence, adjustment, mix Empirical results Conclusions

Labour Market Flexibility Research Seminar, 15 December 2004 What is labour market flexibility? Where? (firms, workers, unemployed, wages, other) What? (available potential vs realised outcome) Counter-factual (flexibility, institutions, regulations) Content (forms, types and manifestations) Similarly –What is a labour market? (regions?) –What do we mean by unemployment?

Labour Market Flexibility Research Seminar, 15 December 2004 Flexibility and regulation General definition (absence of impediments) Non-regulatory inflexibilities and second-best rigidities Regulation: neither sufficient nor necessary UK labour market legislation, Perceptions about changes in flexibility… …and lack of systematic empirical evidence

Labour Market Flexibility Research Seminar, 15 December 2004 Chronology of UK labour laws Source: IER, DTI, B&F (1984), own

Labour Market Flexibility Research Seminar, 15 December 2004 Types of flexibility Economic and managerial perspectives Various typologies Three broad domains Institutional – financial – individual / PF – LC – LS Inside the firm? The ‘flexible firm’ model and its LM-wide relevance Four elements along two axis Internal, External, Numerical, and Functional

Labour Market Flexibility Research Seminar, 15 December 2004

Flexibility in the UK,

Labour Market Flexibility Research Seminar, 15 December 2004 Flexibility in the UK regions

Labour Market Flexibility Research Seminar, 15 December 2004 Elements of flexibility IF EN EF IN

Labour Market Flexibility Research Seminar, 15 December 2004 Literature review Three main strands of literature –UK regional unemployment (patterns & trends) Persistence – Heterogeneity – Synchronicity –Labour market flexibility in the UK Modest growth with deregulation Numerical over functional & numerical vs functional Good for SR efficiency – bad for equity & LR efficiency Composition and context matters –Labour market institutions and unemployment Rigid institutions are bad for unemployment and adjustment

Labour Market Flexibility Research Seminar, 15 December 2004 Research questions Four main questions –Flexibility effects on unemployment –Effects on unemployment persistence –Effects on adjustment to shocks –Compositional effects of flexibility Questions for further research –Spatial interactions and spatial dependence –Effects on underemployment and inactivity –Effects on productivity & dynamic efficiency

Labour Market Flexibility Research Seminar, 15 December 2004 Empirical analysis Macroeconomic modelling –Dynamic specification –Persistence and shocks –The full model

Labour Market Flexibility Research Seminar, 15 December 2004 Empirical analysis General considerations –Asymmetric effects of macroeconomic shocks –The significance of regional & temporal effects (regional heterogeneity and synchronicity) –The endogeneity of flexibility (endogeneity, simultaneity, inverse causality)

Labour Market Flexibility Research Seminar, 15 December 2004

: the impact of flexibility on unemployment

Labour Market Flexibility Research Seminar, 15 December 2004 Conclusions Not equated to institutions (different patterns & effects) Not always beneficial – cannot correct for all problems of the labour market Only conditionally can reduce unemployment Is associated with greater adjustment to shocks Increases unemployment persistence at the sub- national level (cross-regional equilibria?) The mix of flexibility matters (variable & mix effects) Warning: not a tool for economic policy!