Economic Performance in Three Labor Market Models: Flexibility, Rigidity, and Flexicurity

The aim of this paper is to show the superiority of flexicurty model through comparing the economic performance of the three labor market models: flexibility, rigidity, and flexicurity. The analysis is composed of two parts. The first is the classification analysis of labor markets. The second i s regression analysis of the impacts of labor market institutions on the economic performance. EPL index (EPL) was used as a major indicator of labor market flexibility, while the expenditure on active labor market policies a s percent of GDP (ALMP) was used as an indicator of labor market security. In the regression equations, employment rates, unemployment rates, poverty rate, and Gini coefficient were included in dependent variables as the indicators of economic performance, while EPL, ALMP, unemployment replacement rate, duration of unemployment benefit, union density, and collective bargaining coverage, tax wedge, and rate of inflation were included in independent variables. Pooled data of independent variables and dependent variables for 4 years (1990, 1995, 2000, 2005) in 19 OECD countries were used. Estimations were made for both random effects model and fixed effects model. Unemployment rate was the highest in rigidity model 1(high EPL and high ALMP) and was the lowest in flexibility model. Employment rate was the highest in flexibility model and the lowest in rigidity model 2(high EPL and low ALMP). Income inequality measured by Gini coefficient and poverty rate was the highest in flexibility model and was the lowest in flexicurity model. This means that while flexibility model shows the best performance in terms of quantity of employment, flexicurity model shows the best practices in income equality and better employment performance than rigidity model. Thus it can be concluded that flexicurity model is superior to both rigidity model and flexibility model. Major findings f rom the regression analysis are as follow. Flexible labor market decreases unemployment rate and increase employment rate. ALMP is found to have no significant effect on unemployment and employment. But, interaction between flexible labor market and ALMP, which represents the extent of flexicurity, is found to reduce unemployment rates and increase employment rates. Especially, it has a stronger effect on reducing long-term unemployment rate. This means that not only flexible model (with low EPL) but also flexicurity model (with low EPL and high ALMP) has good employment performance, that is, low unemployment rate and high employment rate. Flexible labor market is found to increase Gini coefficient. ALMP i s f ound to decrease Gini coefficient and to reduce poverty rate. Duration of unemployment benefits is also found to decrease Gini coefficient and to reduce poverty rate. These results suggest that flexible labor market tends to aggravate income inequality, while rigid labor market tends to decrease income inequality. They also suggest that active labor market policies and generous unemployment benefits tend to improve income distribution. It is notable that ALMP is found to have a stronger effect to reduce income inequality than EPL. In this paper I clarified that the reason why flexicurity model shows superior economic performance is that it combined low EPL with high ALMP. Low EPL as well as ‘low EPL with high ALMP’ can decrease unemployment rate and to increase employment rate. Unemployment replacement rate had no significant effect on unemployment and employment. This analysis implies that among the “Golden Triangle” of the Danish flexicurity model, flexible labor market and active labor market policies, ra ther than generous welfare systems, are more important factors in high economic performance. This paper suggests that flexicurity model could be a third way for sustainable growth with innovation and social cohesion in the era of globalization and knowledge-based econom y.