From a global perspective: Assessing the effects of labor market reforms

Since the 2008/09 global recession unemployment and inequality have been on a rise. Reforms of labor markets have been one prominent feature in different countries and regions over the last years, not least in the context of the 2008/09 global recession.  There has also been a continued debate in both the academia and policy circles about the effects of labor market reforms and regulation.

There are some who argue that labor market reforms and regulation have adverse effects on employment growth, increase in temporary/part-time or informal forms of employment and that it leads to higher unemployment especially among youth. However, the empirical evidence has been quite mixed and the direction remains unclear.  Along with labor market reforms, a wide range of active labor market policies were also introduced in both advanced and emerging economies to get the working age people off benefits and into during the crisis. Many of these policies or programs were defined and implemented differently across countries and the extent to which they were successful also differed.

Addressing inequality has been another objective for many countries since the economic crisis.  There is a renewed interest since the 2008 economic crisis on minimum wages as a useful and relevant policy tool as more and more countries experience increase in both income and wage inequality. A number of emerging and developing economies have been more active in revising the minimum wages on a regular basis. Even in advanced countries, such as Germany, the UK, and the US, minimum wages have gained importance to address income inequality.

Finally, collective bargaining is a labor market institution that has long been recognized as a key instrument for addressing inequality in general and wage inequality in particular.  A number of countries across the different regions also introduced non-contributory social security schemes to provide income to the poor and to reduce inequality.

 Eichhorst, Rider, Mahmood

Discussing labor market reforms (from the left): Werner Eichhorst (IZA), Guy Rider (Director-General, ILO), and Moazam Mahmood (Head of ILO Research Department)

To achieve a better understanding of the effects of labor market reforms and the effectiveness of public policies, a conference was hosted jointly by the ILO and IZA in March 2016 at the ILO headquarters in Geneva (see program).  Co-organized by Werner Eichhorst on behalf of IZA, the conference provided the forum for a broad debate about the design and the effects of reforms affecting labor market institutions.

From the presentations it became clear that evidence on significant positive short-run effects of flexibility-enhancing reforms, e.g. with respect to employment protection on job creation is scarce. At the same time many speakers stressed the importance of a positive macro-economic environment to realize the full positive potential of labor market reforms instead of creating more instability in the labor market.

This is particularly true for reforms expanding unemployment benefits and active labor market policies while lowering employment protection. This flexicurity approach might be desirable as it reduces the risks of persistent unemployment and provides sufficient support for job seekers (see the most recent IZA paper by Eichhorst, Marx and Wehner) – however, job finding opportunities and funding requirements depend on economic dynamism.

[Click here to watch the panel discussion video]

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