Are corporatist labour markets different? Labour market regimes and unemployment in OECD countries

Abstract.Empirical studies on the unemployment effects of labour market institutions show contradictory results. One explanation is that these institutions affect unemployment differently depending on the regime in which they operate. Because of good labour relations, institutional complementarities and a trade-off between external and internal flexibility, they produce distinctive effects in corporatist regimes. Based on empirical evidence from 20 OECD countries over the period 1985-2008, the author finds that, in corporatist labour markets, strict employment protection legislation reduces unemployment, and unemployment benefits have no negative effect. He also shows that high real interest rates, low capital accumulation and restrictive fiscal policy during recessions increase unemployment.What determines structural unemployment? The answer to this question is of crucial relevance to economic theory and policy - and to the well-being of societies. Yet so far there exists no empirical consensus explanation. Although many econometric studies have investigated this topic, their results are very ambiguous. According to the "standard explanation", structural unemployment is driven by labour market inflexibility. This view is shared by many authors who argue that unemployment is primarily the result of rigid labour markets (e.g. OECD, 1994; Nickell, 1997; IMF, 2003; Nickell, Nunziata and Ochel, 2005; Bassanini and Duval, 2006 and 2009).But other researchers object that the empirical support for this view is not conclusive. For example, Blanchard and Katz (1997, p. 68) argue that "the cross-country evidence on the relation of unemployment to rigidities is less than fully supportive". Fitoussi et al. (2000, p. 257), referring to the OECD Jobs Study series, find that "the institutional reforms in the OECD proposal can only be a small part of the story". Baker et al. (2004a, p. 15) consider the impact of labour market institutions on unemployment to be nebulous: "While it is possible to construct multivariate regressions that find significant relationships between various labour market institutions and the unemployment rate, it is also easy to construct equally plausible regressions that do not". Baccaro and Rei (2007, p. 563) show that "the impact of labor market institutions is, for the most part, not robust and that unemployment is mostly increased by high real interest rates and independent central banks". Freeman (2007, p. 19) remarks that "despite considerable effort, researchers have not pinned down the effects, if any, of institutions on ... unemployment and employment". Bell and Blanchflower (2009, pp. 15-16) conclude: "The orthodox explanation of unemployment that argues that institutions matter has been subject to fairly extensive econometric testing, and in recent years, the validity of the empirical results supporting this view has been called into question. It has proved difficult to ... show that any of the labor market rigidity variables work." And Stockhammer and KlA¤r (2011, p. 455) present evidence to the effect that "[l]abour market institutions do have an effect on unemployment, but it is a comparatively minor one. Macroeconomic variables have a much greater impact and among these capital accumulation ... and the real interest rate are the most important ones".The impact of labour market institutions on employment is thus the focus of an ongoing debate. Against this background, this article shows that one of the reasons why it is hard to detect a robust impact is that there exist different labour market regimes across the OECD countries. External labour market flexibility does not play the same role in determining unemployment in corporatist labour markets as in non-corporatist ones. This result remains robust after accounting for various macroeconomic variables, including real long-term interest rates, capital accumulation, and monetary and fiscal policy reactions to recessions.The remainder of the article is structured into four sections. …