Unemployment and Institutions Ton van Schaik Globus Conference Tilburg University January 29, 1999

Ton van Schaik

Overview of Presentation Evidence on Structural Unemployment Measurement of Institutions Unemployment and Institutions

Relative Productivity and Structural Unemployment GDP per capita relative to US: Range between 40% and 80% Natural Rate of Unemployment US: 6 % (1900-2000)

Structural Unemployment OECD Indicator Non-accelerating Wage Rate of Unemployment Correlation with Total Unemployment larger than 90% In the 1990s, the Structural Unemployment rate has …

Unemployment has risen… Mean 7.8 (1990), and 8.1 (1997) Standard deviation 4.2 (1990) and 3.9 (1997) Average OECD structural unemployment includes for example Greece and Turkey

Broad factors to explain structural unemployment (I) Search frictions in the matching process This is the intensity with which workers are looking for a job and the costs and benefits of posting a vacancy by employers.

Broad factors to explain structural unemployment (II) Efficiency wage considerations Employers have some reason (worker health, worker turnover, worker effort, worker quality) to pay a wage in excess of the market-clearing wages

Broad factors to explain structural unemployment (III) Role of trade unions in bargaining Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power. More powerful unions will negotiate higher wages and thus higher rates of unemployment.

Institutions Long-run determinants are factors that are likely to change slowly over time, like the social Infrastructure of the economy. Social Infrastructure is the collection of laws, institutions, and government policies that make up the economic environment.

Differences in levels of economic success …. across countries are driven primarily by the institutions and government policies (or infrastructure) that frame the economic environment in which people produce and interact.

Diversion of output versus production of output A successful infrastructure encourages production. At the same time, the power to make and to enforce laws is the power to break them. This suggests the importance of the separation of powers and a system of checks and balances.

Measures of infrastructure (Hall and Jones: > 100 countries (I) Index of the extent to which government policies favour production instead of diversion. The extent to which the economy is organized around the principle of private ownership of the means of production.

Measures of infrastructure (Hall and Jones: > 100 countries (II) Openness-interference with trade is a sensitive indicator of the degree to which the government itself engages in diversion. Distance from the equator/ climate – language Most important element of the infrastructure , from the point of view of encouraging high levels of economic activity, is the enforcement of private property rights.

GDAP: Government anti-diversion policies (I) The government’s role in protecting against private diversion Law and order Bureaucratic quality

GDAP: Government anti-diversion policies (II) The government’s possible role as a diverter Corruption Risk of expropriation Government repudiation of contracts

Measurement of institutions (I) It is widely accepted in the economic literature that a country’s competitiveness cannot be reduced to the mere notions of GDP and productivity, because firms must cope with the political, cultural, and educational dimensions of countries, as well as their economies.

Measurement of institutions (II) Product Market Indicators Labour Market Indicators (Social) Infrastructure Indicators 20 OECD countries Two periods: 1983-1988 and 1989-1994

Measurement of institutions (III) Sources: World Competitiveness Yearbook International Country Risk Guide Business Environment Risk Intelligence OECD Jobs Study

Clustering Reduction of Variables Oblique Principal Component Analysis 101 Indicators 19 Clusters Oblique Principal Component Analysis Social Infrastructure Product Market Flexibility Labour Market Flexibility

Social Infrastructure (I), Questions like (Netherlands) Access to international distribution is well organized in your country (2) In your country, state interference does not hinder the development of business (7) Bureaucracy does not hinder business development (11) The cost of capital in your country does not hinder competitive business development (3)

Social Infrastructure (II), Questions like (Netherlands) Managers generally have a good sense of entrepreneurship and innovation (9) Willingness to delegate authority to subordinates is generally high (7) Industrial relations between managers and employees are generally productive (8) Intellectual property is adequately protected in your country (9) Computer literacy is generally high among employees (10)

Social Infrastructure

Labour Market Flexibility (Netherlands) + Hiring and firing practices are flexible enough (19) + Non-wage incentives (such as profit sharing) are used effectively to motivate employees (13) + Labour standards (fixed-term contracts, minimum wages) are low + Employment protection is low

Labour Market Flexibility

Product Market Flexibility (I), Questions like (Netherlands) Trade policies in your country support international activities of your company in long-term (9) State control of enterprises does not distort fair competition in your country (1) Government price controls do not affect pricing of products in most industries (10) Improper practices (such as bribing or corruption) do not prevail in the public sphere (11)

Product Market Flexibility (II), Questions like (Netherlands) Anti-trust laws do prevent unfair competition in your country (8) Air transport infrastructure meets business requirements very well (8) Port access infrastructure meets business requirements very well (1) Telecommunications infrastructure meets business requirements very well (12)

Industrial Relations Employees identify with company? Values in society support competitiveness? Economic literacy high? Computer literarcy high? Industrial relations productive? Total quality management applied?

Technology and Skills Technological co-operation between companies common? Skilled lanour easy to get? Competent managers available? Total R&D scientists and engineers per 100 labour force

Benefit Duration