sou · GYB393 · 2011-01-01 00:00:00 — From an employment policy perspective it is also important to understand how these interventions have affected the labor market. We mainly focus on the following questions: How does competition affect employment and wages? Are the effects different in different markets and for different groups of workers and how does sickness absence relate to the degree of competition in a market? We do this by empirically describing the relationship between various labor market outcomes on the one hand and competition induced by institutional factors on the other. The institutional changes of interest are the following: The deregulation of the taxi business The introduction of private alternatives in the preschool/school and elderly care sector The introduction of personnel registers in the restaurant business From an imperfect competition perspective, changes in the competitive environment will lead to changes in employers market power. Market power is typically associated with higher profits than under competitive conditions. To keep prices, and hence Competition and employment – An empirical study of five markets Bilaga 7 till LU2011 profits, above their equilibrium levels monopolists need to keep production at lower levels. Thus, production and employment is bound to increase when competition rises. Lower production levels results in a lower labor demand. and Giavazzi (2001) points at entry costs as a cause for low employment. Deregulation means that entry costs are reduced, and can therefore lead to higher employment. The rents generated by market concentration can be shared with the employees to different extent and in different forms. Competition can also alleviate labor market discrimination. Since discrimination is costly, increased competition forces firms to behave more efficiently and to end discriminatory behavior. If the profits made in the non-competitive market are shared with workers wages will be higher than under full competition. The theoretical literature has presented several reasons to why monopolists might share their profits with employees. Alchian and Kessel (1962) suggest that large profits challenge the very existence of the monopoly, since they might draw the authorities attention to them. Another theoretical approach, represented by for instance Salinger (1984) emphasizes the role of unions. Unions force firms to pay out higher wages if profits are high. Higher wage claims due to market concentration may also spill over into higher long run unemployment levels. The reason is that less competition makes it possible for firms to raise prices in response to higher wage claims, which lead to lower quantities sold and produced, and hence a lower labor demand. The monopsony theory on the other hand, emphasizes the dominant role of a firm in the labor market (for an overview, see Boal and Ransom 1997). When workers have low wage elasticity firms can use their market power to keep wages down. This scenario is particularly applicable when analyzing the market dominance of the public sector, since these markets often are characterized by high specialization and, accordingly, few alternative employers outside the profession. The relationship between competition and sickness absence has not received as much attention in previous literature. is perceived to increase efficiency one possible mechanism is that increased efficiency would affect sickness absence. In which direction, depends on what firms find efficient – to improve the work environment to reduce absence or to increase the effort of the employed. Since the Swedish sickness insurance Bilaga 7 till LU2011 Competition and employment – An empirical study of five markets system involves firms co-financing short term but not long term absence the latter effect is potentially more likely. Another important mechanism is that increased wages increase the cost of absence. This suggests that there can be a negative effect on sickness absence in sectors that experience an increase in wages. The first outcome of interest in the empirical analysis is employment, measured as the number of people working in each of the markets of study. Our data also make it possible to look at aggregated hours worked, derived from information on individual annual income divided by the individual wage.20 Apart from average effects we also describe the employment outcomes for different groups of workers with a special focus on immigrants, youths and workers close to retirement age. Given the systematically lower employment in these groups it is particularly interesting to study whether competition leads to compositional changes among the employed in these dimensions. A second outcome of interest is wages. The theoretical predictions of changes in wages differ depending on the market of study. According to the monopsony model wages should increase when more participants enter the market. Another argument is that wages decrease as rents are diminished when competition increases. A third focus is to investigate the effects on sickness absence. to the large increase in sickness absence since the 1990s in this outcome is of large interest among Swedish policy makers. is predicted to increase efficiency, which may affect the work environment negatively and increase sickness absence. If wages are affected, the effect might be enhanced or counteracted by making sickness absence more or less costly, depending on the direction of the wage effect. An increase in competition can in addition lead to improvements in the work environment through an increased competition over workers. Which effect that dominates is an empirical question and previous literature gives guidance. 2 Data and empirical strategy The data comes from the IFAU-database and IFAUs social insurance register, which contain population-wide registers collected by Statistics . The analysis is based on four main 20 The data do not contain hours worked for each individual. Competition and employment – An empirical study of five markets Bilaga 7 till LU2011 The first register, RAMS is a linked employer- employee database containing all workers in between 1985 and 2008. The data contains the individual workplace, its location and detailed industry affiliation (5-digits). This makes it possible to identify all workers employed in each industry of interest. The data can be linked to information on a large number of individual characteristics (), monthly wages (Strukturlönestatistiken) as well as sickness absence (Socialförsäkringsdatabasen, 1990–2006). While most of the data are nation wide, wages are available for all publicly employed and for a sample of private firms. Data contains weights that make it possible to obtain aggregated statistics that are nationally representative. We measure the impact of competition on the outcomes of interest by comparing the outcomes of the policy changes the variation in competitive pressure over time and across regions or occupational groups. The empirical method is presented in conjunction with each of the markets below. The taxi market was liberalized in a reform in 1990. Prior to the reform, the number of taxi cars was regulated. In order to put a car into traffic one needed a permit from , who based their decision on advice from trade organizations within the taxi business. A permit was also location specific and all taxi businesses had to be connected to one common taxi central. Since 1990 it is free to set up a taxi business and to chose which (if any) taxi central to use. We compare employment in the taxi business before and after the reform with employment in the service sector and with carrying traffic. Workers in carrying traffic are similar in terms of educational/licensing requirements and should thus constitute an alternative occupation for taxi drivers. Taxi drivers are identified using the firm register but since most taxi drivers are self- employed, which increases the risk of measurement error in their primary source of living and hours worked, it will be difficult to assess the full impact of employment and wages in this sector. Bilaga 7 till LU2011 Competition and employment – An empirical study of five markets Because of this the primary focus relies on compositional changes in this group. The deregulation of the taxi industry represents an example of reduced entry costs in the private market. The theoretical prediction for employment is that it will increase in response to increased production levels and reduced costs of entry. Figure 1 illustrates the development of employment in the taxi industry. We can see that the number of employed individuals experienced a sharp decrease in the years following the deregulation, but that the number of hours worked exhibit a steady increase during the whole period, except for a temporary drop in 1993. Figure 1 Employment in the taxi industry 1989–2007 Number of hours/1000 The sharp drop in the number of employed in 1991–1993 can be attributed to the recession in during this period. If we compare the employment level in taxi with the service industry in general and with carrying traffic, it seems to have been more affected, but in the long run it has gained in comparison with carrying traffic and to some extent in comparison to the service Competition and employment – An empirical study of five markets Bilaga 7 till LU2011 However, the relative level compared to the service sector lies of approximately the same level as in the year preceding the deregulation. When we turn to compositional changes in the labor force employed in the taxi industry we observe considerable changes. For most groups there seem to be a modest change in the likelihood to work in the taxi industry in the year immediately following deregulation, although the employment among highly educated and those born outside have increased somewhat. However, in 2007 there is a remarkable increase in the share born outside , highly educated and older people (Figure 2). Changes in the demographic composition among taxi drivers In the regression analysis, we contrast the development of employment in the taxi industry to the service industry in general and to carrying traffic21. The regression results confirm the picture from the graphical analysis; the number of employed has increased and it has done so in comparison to both the service sector in general and the carrying traffic industry. The effects are especially pronounced for individuals aged 50–64 and those born outside . The change among highly educated is smaller in magnitude than in the previous groups and occurs on long term only. 21 The comparison with carrying traffic yields approximately the same pattern. Thus, the estimates from these regressions are omitted. Bilaga 7 till and employment – An empirical study of five markets Effects of deregulation on employment and monthly wages Comparison group: Service sector 0.109*** 0.153*** 0.217*** -0.038*** 0.379*** 0.701*** 0.120*** -0.122*** 2,973,655 Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. Since entry regulations allow firms to exert rents, we expect wages to decrease after the deregulation. Column 5 in Table 1 confirms the theoretical prediction; wages have decreased by about 4 percentage point in the short run and with an additional 12 percentage point decrease in the long run. Decreasing wages and more efficiency in production would suggest an increase in sickness absence. We find that long term absence and the length of sickness absence do increase in the short run, but in the long run the effect seems to cancel out. The estimates can be found in Table 2. Effects of deregulation on sickness absence -0,011*** 1,230*** 0,005* (0,003) (0,467) (0,002) -0,028*** -1,561*** -0,008*** (0,003) (0,455) (0,002) Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. In 1995, a new law gave local governments the right to allow private daycare centers to enter the market. Before this law only non-profit parent cooperatives or other non-profit organizations could receive public funds. Since the barriers to enter this market are low due to e.g. low start up costs, the new law gave rise to an Competition and employment – An empirical study of five markets Bilaga 7 till LU2011 increase in private alternatives. However, there is large variation in the degree of privatization across municipalities. The bulk of non- public preschools are still not owned by for profit firms, but of cooperatives and non-profit organizations. Since 2006 all municipalities are obliged to provide all preschools with funds as long as they fulfill certain requirements. It is therefore interesting to study how lowering the entry barriers for daycare centers affect employment, wages and sickness absence in this market. We use the regional variation in the share of children in private daycare over time to estimate the relationship between private competition and employment, wages and sickness absence, The number of employed in Swedish preschools have decreased since 1994, although there is some recovery in the numbers since 2002. Some of the pattern we observe in figure 3 may of course be a result of changes in children cohorts, but following the cut backs due to the economic crisis in the 1990s the number of children per worker increased from 4.4 in 1990 to 5.6 in 1998 (SOU 2000:3). Bilaga 7 till LU2011 Competition and employment – An empirical study of five markets Figure 3 Employment among preschool personnel 1994–2007 of hours/1000 Number of hours/1000 During the same period private initiatives in the preschool sector have increased. Figure 4 describes the development of private versus public preschools, measured as the share of children and workers in private preschools from 1994 to 2007. Competition and employment – An empirical study of five markets Bilaga 7 till LU2011 Figure 4 Privatization 1994–2007 In the regression analysis we turn to the question of whether privatization has affected the the number of employed in the preshool sector, their wages and their sickness absence. We exploit regional variation in the extent of privatization measured as the share of children in private preschools over time and control for municipal characteristics such as political majority and immigrant share, the number of children of preschool age, municipality fixed effects and common time effects. In the wage and sickness absence analysis we also include a number of individual characteristics. We find a positive relationship between competition from private preschools and the number of employed in preschools. However, since the increase in the number of employed was not followed by an increase in the number of worked hours it seems like the increase was not due to an increase in the number of fully employmed. In the first panel of Table 3 we can see that the effect on the log of hours worked was negative although not significant whereas the second panel shows a significant increase in the number of employed of 24 percent as a response to full privatization. Interestingly, competition from private alternatives seem to lead to an increase in male personnel and youths, measured both as the number of hours worked and the number of individuals. For both measures we also find a decrease in personnel with a pedagogic education. Bilaga 7 till and employment – An empirical study of five markets Impact of privatization on employment Outcome log(Hours worked) -0,022 1,251*** -0,126 -0,200*** 0,476*** (0,075) (0,199) (0,117) (0,063) (0,174) Outcome: log(Employed individuals) 0,244*** 1,374*** -0,135** 0,917*** (0,0808) (0,174) (0,117) (0,0573) (0,164) Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. Table 4 contains the estimates of the effect of competitions from private preschools on the wages for all employed in the preschool sector (column 1), and for publicly and privately employed sepatately (column 2 and 3). The point estimates are positive for the publicly employed and negative for the privately employed, which is consistent with theory. None of the estimates are, however, statistically significant. Impact of privatization on wages Outcome: log(Monthly wages) -0,033 (0,028) (0,020) (0,045) Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. When studying the effect of privatization on sickness absence, we find negative point estimates, alhough the effects are not statistically significant except for the number of days of sickness Competition and employment – An empirical study of five markets Bilaga 7 till LU2011 The results can be found in table 5. Thus, it seems that privatization does not affect the probability of being absent due to sickness, but that there might be a negative effect on the length of the sickness spell. Using the sample of public and private employees separately does not generate any significant effects. Impact of privatization of sickness absence -0,010 -5,584* -0,017 (0,016) (0,014) Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. In the 1990s introduced a number of market-oriented reforms, aimed at raising efficiency in the public school system. One of these reforms, the Swedish voucher reform, allowed publicly funded private schools to enter the market. This gave rise to a large increase of private employers and regional variation in the expansion of private schools. At the same time there was a school choice reform expanding parents choice of educational provider. , from a situation where public schools were essentially local monopsonists in their employment of teachers, these reforms introduced competition both on the demand side and the supply side. We exploit the regional variation in private school teachers and pupils in private schools, to describe how wages, employment and sickness absence have changed with the inflow of private alternatives in the teachers market. Similar to preschools, there is a large regional variation in the extent of privatization across municipalities. Bilaga 7 till LU2011 Competition and employment – An empirical study of five markets Figure 5 illustrates the expansion of private schools in during 1992–2007. During the same period there has been a sharp increase in the number of employed teachers. Figure 5 Privatization 1992–2007 Similarly to the analysis of preschools, we estimate the effect of privatization utilizing the regional variation over time. The same controls are used here, except that we use the number of children in school age instead. Table 6 show the results for the number of hours worked (the estimates for the number of employed are similar and are hence left out). Our estimates suggest that privatization is associated with an increase in school employment. The increase holds for men, individuals born abroad and certified teachers. Thus, in contrast to preschools it seems like privatization increases the share of certified workers. Competition and employment – An empirical study of five markets Bilaga 7 till LU2011 The impact on employment of privatization Outcome variable: log(Hours worked) Share of pupils in 0,591*** 1,750*** 1,106*** 0,613*** 0,324* (0,164) (0,239) (0,148) (0,240) (0,160) (0,195) Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. From Table 7 we can see that wages in the school sector have increased with the degree of privatization. The effect is driven by higher wages among publicly employed, which is consistent with theory. When private units enter the market, the public sector is forced to raise wages to keep their labor force. The estimate suggests that the monthly wage increases by 1.7 percentage points when the share of pupils in private schools increase by 10 percentage units. The impact on wages of privatization Outcome variable: log(Monthly wages) Share of pupils in 0,204*** 0,195*** -0,197 (0,045) (0,045) (0,206) (0,028) (0,020) (0,045) Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. The wage effect is positive for all groups, but the magnitude is highest for individuals born outside of , women and qualified teachers. When estimating the relationship between privatization and sickness absence we find no statistically significant effect. The magnitude of the point estimates is also very small. The results can be found in table 8. The results for private and public sector employees show the same pattern. The explanation to this pattern Bilaga 7 till LU2011 Competition and employment – An empirical study of five markets could be that there is no connection between sickness absence and privatization. Another possibility is that there are several, counteracting effects. It is possible that the work environment have changed for teachers, but that the effect is counteracted by the increased cost of absence due to the raised wages. Impact of privatization of sickness absence Share of pupils in (0,009) (2,730) (0,009) Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. Since the 1990s there has been a large expansion of private alternatives within elderly care. In contrast to daycare and schools where private firms have free entry, privatization has mainly taken place through municipalities contracting out elderly care. Some municipalities have also implemented choice based systems, where the consumer can choose between providers approved by the municipality. In these cases privatization is more characterized by free entry. In a similar strategy as above we exploit municipal variation in private alternatives to investigate the importance of privatization on employment and wages. We will focus on home services due to data limitations. The explanatory variable is the share of help hours performed by private providers. Employment in home services for the elderly has increased since 1999. This is hardly surprising since the number of people over 65 years have increased lately. Table 9 illustrates the results from the regression analysis. The results show that there is a positive effect on employment of privatization, both measured as the number of individuals employed and the number of hours worked. Competition and employment – An empirical study of five markets Bilaga 7 till LU2011 increase was particularly high among younger people. For men and individuals born outside employment have increased, but not hours, which suggests that it is mainly part time work that has increased among these groups. Impact of privatization on employment Outcome variable:log(employed) 0.674*** 0.938*** Outcome variable: log(hours worked) 0.594*** 0,565*** (0,198) Note: *, ** and *** denote statistical significance at 10, 5 and 1 percent level respectively. Table 10 suggests that wages in home services for the elderly have increased among public sector employees in municipalities with more privatization. The estimate for private sector employees is negative, although not significant. All in all, there seems to be no effect for the employees as a group. The elderly care sector has one of the highest sickness absence shares and several studies have found that the employed find the working environment poor and that occupational related diseases are common (SCB 2004, 2001). Sickness absence is higher among publicly employed than among those working in the private sector, but whether this is due to differences between sectors or due to sorting of employees is difficult to tell. As we can see from Table 10 privatization seems to affect sickness absence negatively; a 10 percent increase in privatization is associated with a reduction in the probability of sickness absence with about 0.3 percentage units.