EMPLOYMENT FLEXIBILITY AND UK REGIONAL UNEMPLOYMENT

EMPLOYMENT FLEXIBILITY AND

UK REGIONAL UNEMPLOYMENT

Vassilis MONASTIRIOTISEuropean Institute, LSE

[email protected]

Labour Market Flexibility ResearchSeminar, London, 15 December 2004

Labour Market Flexibility Research Seminar, 15 December 2004

Overview of presentation

• Introductory notes• What is labour market flexibility?

– theory and measurement

• Literature review– institutions, unemployment, and flexibility

• Research questions – unemployment, persistence, adjustment, mix

• Empirical results• Conclusions


What is labour market flexibility?

• Where? (firms, workers, unemployed, wages, other)

• What? (available potential vs realised outcome)

• Counter-factual (flexibility, institutions, regulations)

• Content (forms, types and manifestations)

• Similarly– What is a labour market? (regions?)– What do we mean by unemployment?


Flexibility and regulation

• General definition (absence of impediments)

• Non-regulatory inflexibilities and

second-best rigidities• Regulation: neither sufficient nor necessary• UK labour market legislation, 1980-2000• Perceptions about changes in flexibility… • …and lack of systematic empirical evidence


Chronology of UK labour laws

Source: IER, DTI, B&F (1984), own


Types of flexibility

• Economic and managerial perspectives• Various typologies• Three broad domains

Institutional – financial – individual / PF – LC – LS

• Inside the firm?The ‘flexible firm’ model and its LM-wide relevance

• Four elements along two axisInternal, External, Numerical, and Functional


Flexibility in the UK, 1985-2004

0.4

0.6

0.8

1

EF IN EN IF PF


Flexibility in the UK regions

1985-1988 2001-2004


Elements of flexibility

IF EN

EF IN


Literature review

• Three main strands of literature– UK regional unemployment (patterns & trends)

Persistence – Heterogeneity – Synchronicity

– Labour market flexibility in the UKModest growth with deregulation

Numerical over functional & numerical vs functional

Good for SR efficiency – bad for equity & LR efficiency

Composition and context matters

– Labour market institutions and unemploymentRigid institutions are bad for unemployment and adjustment


Research questions• Four main questions

– Flexibility effects on unemployment– Effects on unemployment persistence– Effects on adjustment to shocks – Compositional effects of flexibility

• Questions for further research– Spatial interactions and spatial dependence– Effects on underemployment and inactivity– Effects on productivity & dynamic efficiency


Empirical analysis• Macroeconomic modelling

– Dynamic specification

– Persistence and shocks

– The full model

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Empirical analysis• General considerations

– Asymmetric effects of macroeconomic shocks

– The significance of regional & temporal effects

(regional heterogeneity and synchronicity)

– The endogeneity of flexibility(endogeneity, simultaneity, inverse causality)


: the impact of flexibility on unemployment


Conclusions• Not equated to institutions (different patterns & effects)

• Not always beneficial – cannot correct for all problems of the labour market

• Only conditionally can reduce unemployment• Is associated with greater adjustment to shocks• Increases unemployment persistence at the sub-

national level (cross-regional equilibria?)• The mix of flexibility matters (variable & mix effects)

• Warning: not a tool for economic policy!

EMPLOYMENT FLEXIBILITY AND UK REGIONAL UNEMPLOYMENT

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