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Labor market deregulation and globalization: empirical evidence from OECD countries

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Abstract

This paper empirically investigates the influence of globalization on various aspects of labor market deregulation. I employ the data set by Bassanini and Duval (2006) on labor market institutions in OECD countries and the KOF index of globalization. The data set covers 20 OECD countries in the 1982–2003 period. The results suggest that globalization did neither influence the unemployment replacement rate, the unemployment benefit length, public expenditures on ALMP, the tax wedge, union density nor overall employment protection. In contrast, protection of regular employment contracts was diminished when globalization was proceeding rapidly. In fact, domestic aspects, such as unemployment and government ideology are more important determinants of labor market institutions and deregulation processes in OECD countries than globalization. For this reason, working conditions of unskilled workers are not likely to deteriorate and the jobs of unskilled workers are not likely to disappear in the course of globalization. All this is, of course, not to insinuate that globalization has any benign influence on labor market institutions.

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Notes

  1. For empirical investigations how labor market deregulation affects unemployment see, for example, Blanchard and Wolfers (2000), Baccaro and Rei (2007) and Feldmann (2009). See also Boulhol (2009b) who shows how foreign labor market institutions affect a country’s unemployment rate through the trade channel.

  2. These data have been employed, for example, by Bassanini et al. (2009), who examine the influence of job protection legislation on productivity growth and are available at http://bassax.freeyellow.com/ .

  3. In the 1985–2001 period, data are missing for Denmark in 1985, for Japan in 1986, for Ireland in 1992, 1993, 1996, 1997, 1998, 1999 and 2000, for Portugal in 2001.

  4. Moreover, the data allow distinguishing between two types of EPL: protection of regularly and temporary employed workers.

  5. On the measurement of globalization see also, for example, Edwards (2007).

  6. In order to test for stationarity of the time series, I apply a battery of panel unit root tests. The advantage of the panel unit root tests compared to the univariate counterparts is their greater statistical power. It is important to note, however, that the tests to a panel also relate to asymptotic theory and therefore loose power in small samples (see, for example, the survey on unit roots and cointegration in panels by Breitung and Pesaran 2008). I applied the Levin et al. (2002), Im et al. (2003), Breitung (2000) and the Fisher tests referring to Maddala and Wu (1999) and Choi (2001). The results were obtained using Eviews 6. Regarding the first three tests, maximum lag lengths are automatically selected based on the Schwarz Information Criterion. The remaining two tests use the Bartlett kernel for the Newey–West bandwidth selection. The probabilities for the Fisher tests are computed using an asymptotic Chi-square distribution. All other tests assume asymptotic normality. The test regressions in levels include a constant and a linear deterministic trend; the test regressions in growth rates include a constant but no linear deterministic trend. The results of different unit root tests demonstrate that one mostly cannot reject the null hypothesis of a unit root in levels, but one can always reject the null hypotheses of a unit root in growth rates. For this reason, the time series in growth rates are stationary.

  7. Years, in which the government changed, are labeled according to the government that was in office for a longer period, e.g. when a rightwing government followed a leftwing government in August, this year is labeled as leftwing.

  8. This is a significant point because politicians implement their preferred policies step by step during the legislative periods.

  9. I choose the Blundell–Bond (1998) estimator as the initial estimator in which the instruments are collapsed as suggested by Roodman (2006). This procedure makes sure to avoid using invalid and too many instruments (see Roodman 2006 and 2009 for further details). Following Bloom et al. (2007) I undertake 50 repetitions of the procedure to bootstrap the estimated standard errors. Bootstrapping the standard errors is common practice applying this estimator. The reason is that Monte Carlo simulations demonstrated that the analytical variance estimator performs poorly for large coefficients of the lagged dependent variable (see Bruno 2005b for further details). The results do not qualitatively change with more repetitions such as 100, 200 or 500 or when the Arellano–Bond (1991) estimator is chosen as initial estimator.

  10. I employed the data by Bassanini and Duval (2006).

  11. I will sketch the globalization-induced responses of the welfare state in the next subsection.

  12. Dreher et al. (2008b) and Gemmell et al. (2008), for example, empirically investigate the influence of globalization on the budget composition.

  13. See Blanchard and Wolfers (2000: C14ff.), for example, for a brief discussion of the history of unemployment protection in Europe and Deakin et al. (2007), for example, for an encompassing survey on the evolution of labor law in France, Germany, India, the United Kingdom and the United States.

  14. Goerke (2000), for example, presents a theoretical model on employment effects of changes in the composition of the tax wedge.

  15. There are two exceptions: the first difference of the ideology variable in period t − 3 has a positive influence on the growth rate of ALMP spending and is statistically significant at the 10% level. Including the first difference of the ideology variable in period t − 3 turns the growth rate of the overall KOF index of globalization to be statistically significant at the 10% level in the union density equation.

  16. On the effects of trade, trade policy and domestic factors in union wage determination see, for example, Gaston and Trefler (1995).

  17. This finding perfectly corresponds with research on product market deregulation (e.g., Heinemann 2007 and Potrafke 2010) and economic reforms (e.g., Gassebner et al. 2011).

  18. Botero et al. (2004), for example, examine labor market deregulation in 85 countries and find that leftwing governments have been associated with more stringent labor regulations than rightwing governments. Di Tella and MacCulloch (2002) examine unemployment benefits in OECD countries in the 1971–1989 period and find that leftwing governments have provided more generous unemployment benefits than rightwing governments. Overall, however, economic variables such as unemployment and interest rates appear to be more important determinants of unemployment benefits than political variables. Johansen et al. (2007) investigate whether government ideology influenced wage setting in Norway. Their results suggest that changing from a conservative to a social democratic government significantly reduces manufacturing wages and makes wages more responsive to unemployment. Vaubel’s (2008: 462) case study evidence, however, suggests that labor market deregulation in the EU, did not appear to be related to government ideology.

  19. See Feenstra and Hanson 1996 and Feenstra 1998, for contributions on globalization and outsourcing.

  20. See, for example, Munch and Skaksen (2009) for an empirical analysis of Danish manufacturing industries.

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Acknowledgments

I thank Harmen Lehment, Heinrich Ursprung and an anonymous referee for helpful comments, hints and suggestions.

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  1. Department of Economics, University of Konstanz, Box 138, 78457, Konstanz, Germany

    Niklas Potrafke

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Potrafke, N. Labor market deregulation and globalization: empirical evidence from OECD countries. Rev World Econ 146, 545–571 (2010). https://doi.org/10.1007/s10290-010-0056-8

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