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The Effects of Institutions on the Labour Market Outcomes: Cross-country Analysis

Yong-seong Kim, Tae Bong Kim 2018/03/21

※ This is a summary of 「The Effects of Institutions on the Labour Market Outcomes: Cross-country Analysis」in the KDI Journal of Economic Policy (Nov, 2017).

□ Selected OECD countries have witnessed different labour market outcomes despite experiencing the common economic shocks.

○ According to the data on labour market from the mid-1980s to the late 2000s, some countries marked significant improvements while others failed to do so.

 - The OECD statistics showed an increase in employment rate and a decrease in unemployment rate in Netherlands in 2000s compared to 1985-1993, as opposed to the case of Sweden.

□ This paper analyzes the relation between institutional variables and labour market outcomes, recognizing that the difference in labour market performance is partially attributed to country-specific labour market institutions.

○ Labour market outcomes are mainly influenced by economic conditions such as growth rate and business cycle, but they are also affected by labour market institutions.

○ This paper adapts flexible and practical estimation strategy to analyze the effect of labour market institutions on employment and unemployment rate.

 - The results from existing studies have continuously been questioned as they adapted generalized econometric techniques.

□ The major estimation results of this paper are summarized as follows:

○ First, high replacement rate of unemployment insurance is found to lower employment rate, in contrast to the results from the previous studies which said there were no direct relationship between replacement rate and employment.

 - High replacement rate increases financial burden for premium borne by firms and workers which in turn may pose a negative impact on labour supply and demand.

○ Second, negative effect of strong employment protection on total employment, as reported in the previous studies, has not been found.

 - This is because the effect of employment protection on total employment may be ambiguous as employment protection affects labour groups differently.

○ Third, the positive effect of Active Labour Market Policy (ALMP) is once again confirmed in this paper as in the existing studies.

 - ALMP is known to reduce unemployment rate according to most of the existing studies.

 - In addition, this paper reveals that ALMP contributes to raising employment rate unlike the previous studies which reported an ambiguous relation between the two factors.

Enquiries: Yong-seong Kim (Senior Fellow, KDI)(+82-44-550-4011,

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