Shaping earnings instability: labour market policy and institutional factors
Denisa Maria Sologon & Cathal O'Donoghue
#2011-077
The concerns regarding the economic insecurity stemming from earnings
instability have been gaining momentum in the contemporary political
discourse. If earnings instability is as a proxy for risk, for
risk-averse individuals, increasing earnings instability bears
substantial welfare costs. Using the variance of transitory earnings
estimated using the European Community Household Panel (ECHP) and the
OECD labour market indicators, we explore by means of non-linear least
squares the relationship between earnings instability and labour market
policies/institutions across Europe in the 1990s. We find of a complex
system of interactions within the institutional framework affecting
earnings instability. For an average country with a low corporatism, we
find a U-shape relationship between earnings instability and the
strictness of labour market regulation. Corporatist systems have a lower
earnings instability than decentralized economies, they are effective in
reducing the adverse effects of macroeconomic shocks on earnings
instability, and can counteract the increase in earnings instability
associated with the development of ALMPs, with unionization, with
product market regulation and with the tax wedge. The earnings
instability associated with developed ALMPs is reduced by regulated
labour markets, a high corporatism, low non-wage labour costs and high
unemployment benet replacement rates (UBRR). The decrease in earnings
instability associated with an increase in the UBRR is the largest for
developed ALMPs.
Keywords: economic insecurity, earnings instability, labour market
institutions; labour market policies and institutions
JEL classication codes : C23, D31, J31, J60, J50, J08