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EMPLOYMENT FLEXIBILITY AND
UK REGIONAL UNEMPLOYMENT
Vassilis MONASTIRIOTISEuropean Institute, LSE
Labour Market Flexibility ResearchSeminar, 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, 1980-2000• 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 axisInternal, External, Numerical, and Functional
Labour Market Flexibility Research Seminar, 15 December 2004
Labour Market Flexibility Research Seminar, 15 December 2004
Flexibility in the UK, 1985-2004
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EF IN EN IF PF
Labour Market Flexibility Research Seminar, 15 December 2004
Flexibility in the UK regions
1985-1988 2001-2004
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 UKModest 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 unemploymentRigid 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
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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
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!