Economics Department

Enhancing Economic Flexibility: What Is in It for Workers?


Reforms that boost growth by enhancing economic flexibility often meet strong opposition related to concerns that they may imply adverse consequences for categories of workers. This study investigates how making product or labour market regulation more flexible changes workers’ risks of moving out of employment and jobless people’s chances of becoming employed.

Enhancing economic flexibility: What is in it for workers? 
Policy paper

Quicklinks to working papers


Blogpost: What do pro-competitive policies IMPLY for workers?

Blogpost: Coping with creative destruction: reducing the costs of firm exit

Background papers

Effects of flexibility-enhancing reforms on employment transitions

By Boris Cournède, Oliver Denk and Paula Garda

Do flexibility-enhancing reforms imply more employment instability? Using individual-level data from harmonised household surveys for 26 advanced countries, this paper analyses the effects of product and labour market reforms on transitions in and out of employment. Results indicate that reforms making product markets more competitive increase transitions out of employment for less qualified and low-income workers. Less qualified and low-income workers have very high job exit rates to start with, and reforms raise these rates further. On the other hand, more pro-competitive product market regulation generally increases entry rates into employment. The concentration on less qualified and low-income workers of the increase in labour market turnover associated with product market reforms suggests a case for accompanying such reforms with labour market programmes that help the most vulnerable workers transition to new jobs. Easing employment protection for regular or temporary workers has no systematic long-term effect on workers’ probabilities to move in or out of employment. Such reforms can, however, affect employment transitions through their interaction with other policies and institutions. For example, easing employment protection for workers with regular contracts raises the job-finding chances of people out of work in countries that invest a lot in active labour market programmes. Furthermore, employment protection legislation and product market regulation are complementary in that, when either employment protection or product markets are lightly regulated, reforming the other is associated with fewer job exits.


How do product market regulations affect workers? Evidence from the network industries

by Oliver Denk

Knowing who gains and loses from regulatory reform is important for understanding the political economy of reform. Using micro-level data from 26 countries, this paper studies how regulatory reform of network industries, a policy priority in many advanced economies, influences the labour market situation of workers in network industries. Estimates are identified from changes in a worker’s pay, industry-level employment flows and regulation over time. The main finding is that the regulation of network industries provides workers in this industry with a wage premium and higher employment stability relative to similar workers in other industries. Regulatory reform therefore tends to align labour income and employment stability in the reformed industry with those in other industries. Workers in the reformed industry lose out compared with others, because they no longer benefit from “excess” pay and employment stability.


The ins and outs of employment in 25 OECD countries

by Paula Garda

This paper presents quantitative information on labour market flows for 25 OECD countries. It uses household surveys that offer the advantage of reporting monthly transitions between employment, unemployment and economic inactivity for individuals. Between 2005 and 2012, the annual probability of leaving employment averaged 10% across OECD countries. Jobless people have a 30% average probability of finding a job. The analysis uncovers significant cross-country differences and highlights key facts about how labour market flows differ depending on socio-demographic, worker characteristics and the institutional framework. Female, young, low educated and low income workers are at highest risk of becoming jobless. Young jobless individuals have higher chances of finding a job than their older counterparts. Female, low educated and low income jobless individuals face a lower probability of finding a job than others.


Coping with creative destruction: reducing the costs of firm exit

by Dan Andrews and Alessandro Saia

A policy framework that does not unduly inhibit the creative destruction process is vital to sustaining productivity growth. Yet, a key question is what happens to workers who lose their jobs due to this process and what are the policies that minimise the costs of worker displacement? Accordingly, this paper exploits a retrospective panel of workers in 13 European countries over the period 1986-2008 to explore the factors which shape the re-employment prospects of workers displaced due to firm exit. The results suggest that higher spending on active labour market policies (ALMPs), financed through an offsetting reduction in spending on passive measures, can aid the re-employment prospects of displaced workers. There may also be a case to better tailor ALMPs to workers displaced by firm exit to the extent that the re-employment probabilities of this group of workers are more sensitive to ALMPs than workers that are displaced for other involuntary reasons. The effectiveness of ALMPs is also enhanced by lower entry barriers in product markets and higher public sector efficiency, while reductions in the labour tax wedge can aid the re-employment prospects of displaced workers. Finally, regional mobility emerges as a key channel through which workers who lose their job due to plant closure become re-employed, suggesting that housing market policies may also be relevant.


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