1. Tito Boeri Bocconi University and Fondazione Rodolfo Debenedetti Is the Honeymoon Over? Partial Labour Market Reforms nd the Growth of Low Productivity Jobs in Europe

2. 2 Outline Taking stock of reforms in labour/product markets Why more labour than product market reforms? Two-tier reforms. Do they pay in terms of employment? For how long?

3. 3 Acceleration of labour market reforms in recent years Source: fRDB Social Reforms Database * Reforms increasing flexibility and rewards from labour market participation.

4. 4 Deceleration of product market reforms in recent years Source: fRDB Social Reforms Database * Reforms increasing competition in airline, TLC, electricity, gas, postal service, road and railways flexibility. Average Number of Reforms 1985-1990 1991-1996 1997-2002 In 7 product markets 1.21 3.32 1.40 -

5. 5 Some Convergence in EPL?

6. 6 …but not in Product Market Regulations

7. 7 Why is it so difficult to reform product markets? Reforms leaving aside incumbents as in labour markets (e.g., temporary vs. fixed term contracts) are not feasible Benefits of reforms are spread across many individuals, while losses are concentrated Attitude to pursue self-interest as a worker rather than as a consumer (information gathering) However possible to delegate authority to (blame?) someone else (Brussels?): progress of Single Market

8. 8 Reforms of EPL are marginal

9. 9 while Reforms of Product Markets are Radical

10. 10 Summarising More activity and some cross-country convergence in labour market reforms Driven almost entirely by reforms of temporary contracts Deceleration of reforms in product markets Role of political obstacles. Reforms “at the margins” are often the only ones which are politically feasible

11. 11 Outline Taking stock of reforms in labour/product markets Why more labour than product market reforms? Two-tier reforms. Do they pay in terms of employment? For how long?

12. 12 Closing the Employment Gap with the US and Japan? (employment rates) Source: European Commission

13. 13 The distance from Lisbon 0 10 20 30 40 50 60 70 80 Sweden Austria Uk Netherland* Germany Portugal FrancePoland Ireland Greece Hungary Italy Spain Empl rate 1995Empl rate 2003 Progress towards Lisbon

14. 14 Consistent with Theory? Lazear neutrality. Under:  competitive product market (w=MP)  competitive labour market (no unions)  flexible wages (no wage floors)  risk-neutral agents (u(w)=w), interested only in average wages over the period EPL consisting of pure severance has no effects on employment and wages

15. 15 and under rigid wages Two countries both with rigid wages, but EPL only in Rigidland ( R), not in Flexiland (F ) Same technologies: Y=Ai log L Ai can be Ag (good times)>Ab (bad times) Probability p and (1-p) respectively Wages fixed at w

16. 16 Flexiland L maximizes  F = Ai log L – w L Implying w=Ai/L thus under good times higher employment Employment variations  L=(Ag-Ab)/w when from bad to good  L=-(Ag-Ab)/w when from good to bad Average L F = =(pAg+(1-p)Ab))/w

17. 17 Rigidland Too costly to adjust L to shocks. Firms choose average L and stick to it L maximizes  R = (p Ag+(1-p)Ab) log L – wL Implying L R =(pAg+(1-p)Ab))/w =L F

18. 18 Thus Average employment levels are the same in F and R More fluctuations in F than in R With risk-neutral agents, country F is more efficient as under any state of the world, firms make higher profits But if workers are not risk-neutral, they are better off in Rigidland

19. 19 Two-tier systems: The Honey Moon Effect PRE REFORMPOST REFORMTRANSITION Permanent Employment in Good Times Employment in Bad Times Temporary

20. 20 Two-tier systems Flexibility only at the margin Under good times a “buffer stock” is built- up. Hiring of Temps Average productivity declines (under DRS) More turnover, accommodated by TEMPs

21. 21 Anatomy of Employment Growth

22. 22 Anatomy of Employment Growth

23. 23 Anatomy of Employment Growth

24. 24 Anatomy of Employment Growth

25. 25 From jobless growth to growthless job creation

26. 26 Final Remarks Contrary to economic theory reforms of EPL are paying off in terms of employment growth It may be because of honey-moon effect If so, it is temporary And there are indications that is fading away Find soon other trophies to exhibit on Lisbon?